Closing is a crucial component in any transaction, especially an M&A transaction. A well prepared and successfully executed closing enhances the chance of consummation of the transaction. There have been well-established procedures and precedents for closings in developed markets which have been repeatedly tested, followed and respected, by legal practitioners as well as business people, both in terms of contents and formats.
In China, however, despite the fact that this market has become the second largest recipient of direct foreign investments and subject matter of many major international M&A transactions, lawyers, business advisors and business executives are still often found scratching their head and haggling about their closing checklists at the very last minute. More than once, we have seen clients being surprised to their core at the very last minute of a transaction about what documents and in what format thereof they need to receive from their counterparties in order to close the acquisition or sale in a legally binding manner. The ill-preparedness has sometimes directly or indirectly caused a deal to fall apart.
This article shares with its readers a few key factors in terms of achieving smooth closings in China-related M&A deals.
1. A closing in a PRC-related deal is different from that in a traditional Western transaction
Why would a China-related deal involving major international law firms and investment banks who should have been very familiar with closings fall apart over closings? A key factor has often been that a closing involving a Chinese party or other China elements (such as documents governed by PRC law or contracts that will potentially be enforced in China) was not designed in light of PRC laws, especially those PRC laws, regulations, rules, Supreme People’s Court’s opinions and interpretations regarding PRC civil procedure, evidence, commercial registrations, regulatory approvals. The parties to the transaction did not ask certain questions that can only be answered under PRC law, “What if I need to litigate, arbitrate or enforce inChina? What evidence and in what format is admissible in PRC courts? What sufficiently evidences a binding consent or agreement under PRC law? Is a copy of the document sufficient or must the original be obtained? What constitutes an original under PRC law? Whose chop binds whom inChina?”
Only qualified firms and lawyers with deep transaction and litigation expertise inChinacan raise and answer these questions. Those who think that a PRC transaction is just another transaction inNew YorkorLondonmay pay dearly or cause their clients to pay dearly. Closings for PRC deals do differ from traditional Western closings.
2. The closing should be designed and agreed upon from the very inception of the transaction. Ad hoc or last-minute closing arrangements are usually disastrous
Counterparties are most agreeable at the beginning of a deal. They are usually burned out at the last minute. It is essential that parties agree as early as possible as to what documents, what approvals and in what format each party expects to receive at the various stages of a transaction.
PRC Civil Litigation Law[1]and Measures regarding the Civil Litigation Evidence[2]and the ever burgeoning PRC rules and regulations regarding government approvals as well as many other PRC laws, rules, policies or practices dictate the formats and contents of China-related deal closings. Therefore, it is essential to plug in PRC lawyers from the very inception. A common failure factor is to deploy qualified PRC lawyers until it is too late, usually when the transaction documents have been more than half-baked, the transaction structure is already too embedded to change and the parties are already too exhausted to go the extra mile for each other.
3. Closings vary with different counterparties
It is important to note that closings vary deal from deal. They are particularly different when counterparties of different nature are involved. Execution requirements for individuals are different from those for companies. M&A transactions involving state-owned companies or assets are subject to different levels of scrutiny and approval requirements and therefore the closing checklists are materially different from those involving private companies or privately owned assets. Deals involving different industries are also subject to different approval procedures. Closings involving manufacturers are markedly different from those deals involving financial institutions. Clients should always go with the firms and attorneys who have repeated deal experiences.
Last but not least, given the ever-changing legal and regulatory environment for China-related deals, the closing for the previous deal only has reference value for the next deal. The parties involved should always check their closing checklist against the latest laws, rules and regulatory practices.
Key Words: Closing M&A International Dept.
Editor：Frank Hongbo Zhao
Introduction to the Author:
Lan Lan has significant experience advising multinational clients on the structure of their presence inChina through acquisitions. Her practice focuses on multi-industry M&A transactions and advice on transactional and regulatory matters for financial service companies, especially insurance and asset management companies.
Her clients benefit from her in-depth knowledge of the details and nuances of local PRC laws and regulations, as well as the policies and politics behind promulgated laws and regulations, which together form the regulatory and legal environment facing international companies in China.
Before joining JT&N,Lan Lanwas the General Manager of John Hancock Life Insurance Company in China, overseeing its Beijing, Tianjin and Guangzhou representative offices. Prior to joining John Hancock, Ms. Lan practiced law inNew Yorkwith Skadden, Arps, Slate, Meagher & Flom from 1994 through 1998.
Phone: 86-10-5706 8029; E-mail: lanlan@jtn.com
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[1]《中华人民共和国民事诉讼法》，adopted by People’s National Congress of China on April 9, 1991 and amended as of October 28, 2007.
[2]《最高人民法院关于民事诉讼证据的若干规定》，promulgated by the PRC Supreme People’s Court on December 21, 2001 and became effective as of April 1, 2002.