Build Overseas M&A Platform

Currently, the often- or popularly-chosen destinations for corporate cross-border investments include such places as Bermuda, Cayman, Panama, UK, Hong Kong, Singapore, as well as Nevada and Delaware of US, which are mostly preferred in actual overseas M&A. And these places can be generally classified into three categories — offshore destinations, similar offshore destinations such as Hong Kong and Singapore and transit stations with low taxation in the international market. How to choose the suitable place for registration, Mr. Gong Enguang, General Manager of Mossack Fonseca in China told the reporter from China’s Foreign Trade magazine that under different circumstances, they will propose strategic suggestions according to different situations.

At first, he gave an example that for purchasing the US Unocal Corp., China National Offshore Oil Corporation (CNOOC) encountered a political barrier, which represents the barriers that the domestic enterprises may encounter when going global. At that time, CNOOC’s deal was rejected by the US Congress under the pretext of threats to the US energy strategy security, as CNOOC is a Staterun enterprise. However, Sinopec was successful in purchasing the US’ largest International Oil Co., Ltd., which was attributed to the transitional strategic structure Sinopec set up in Bermuda — the First International Oil Co., Ltd.. Sinopec used this Bermuda’s structure to acquire the US program. In this way, Sinopec secretly entered the US market, as Bermuda along with many places above-mentioned is not covered by the corporate laws of the countries these places are located and the information of the company’s stockholder is not filed in the local government. Thus, it’s difficult for other regions to find out the actual controller of these companies. For a registered company in China, the company’s directors can be checked in the Industrial and Commercial Bureau by the lawyer license. However, for the registered companies in Bermuda and Cayman, the local government lacks the files of the company’s directors and has no idea about the company’s controller, which cannot be searched and has nowhere to search. The local legal registered agents and the specialized company registration agencies are generally filed by the local law firms or accounting firms, which cannot disclose the stockholders’information in line with the law requirements and thus cannot be tracked by the general public. In this way, the company can enter a targeted market in a low profile.

When purchasing some overseas energy programs, Chinese enterprises may encounter many political barriers. He took another case for us. Last month, a company went to Europe for buying a nuclear program and how did it make it? It apparently cannot work for a domestic company to go to Europe directly, as it will be confronted with some constraints if it wants to set up a company in Hong Kong. Therefore, it’s natural for us to consider setting up such a structure — first we find an enterprise in another industry of that country, which will be involved in the M&A case. Thus, we privately built a Luxembourg structure and some offshore structures to participate in the local auction case. Why they involve a company in Luxembourg? He further explained that because Luxembourg has signed a closed-door economic contract with that European country, which means that if a company in Luxembourg obtains benefits in the local area, the tax for dividends is only 5%. Such a structure is quite rampant in the current overseas investments. According to the different situations of the enterprises, we may have different preferences for the registration places, taking into consideration avoiding local political barriers as well as freedom and convenience for capital inflow and outflow.

In the aspect of financing during the purchasing, offshore structure also could help the enterprises out of difficulties. He said, in the Last year, the M&A case for Pang Da Automobile Trade Co. to purchase Saab was a failure, partly because the capital could not be remitted timely without official approval from the National Development and Reform Commission. In the past, the company adopted the form of car-purchasing budget. EUR 5,800 was remitted, but it was merely a drop in the ocean and failed to meet the capital demand by Pang Da. Under such a circumstance that follow-up capital cannot be pumped in timely, Saab filed for bankruptcy and thus Pang Da’s acquisition ended. The loss here is quite obvious. At present, as there is no way to break the domestic macro foreign exchange regulation, we need to consider how to quickly participate in an M&A program and to make our capital go out as soon as possible. But more often than not, many M&A programs are quite urgent and have their own backgrounds. Therefore, we need to remit part of the capital. If we have such an offshore structure, it will be more convenient for financing and capital allocation.

“Supposing we have such an offshore structure, we may combine the domestic companies with the offshore structures, where offshore financing can be done by utilizing the domestic company’s credit guarantee in the banks. Such a form of offshore financing is more cost-efficient and the capital can be in place as soon as possible; whereas the remittance of capital base needs a long time, which may fail to solve problems in a short time. In the original framework, it is hard to conduct offshore financing, as with the absence of such an offshore structure it is difficult to build such a platform to obtain the capital. Moreover, the overseas banks have no deep understanding about the domestic enterprises or programs, which makes it difficult for us to get financing support.” he said frankly. So he thought that such domestic banks as China Merchants Bank, Bank of Communications, Shanghai Putong Development Bank and Shenzhen Development Bank have been all granted with offshore bank licenses, which can provide offshore financing for the overseas branches of the enterprises that aims at going global. Then, what can be guaranteed for financing? He said: “The domestic enterprises’ credit in banks may serve as collateral. Besides, we may also resort to other overseas financing means, such as private placement. Without an overseas structure, it would be difficult to solve this problem.”

At last, he suggested that there are also other considerations for setting up such a structure. If a Chinese company directly takes over such an enterprise in foreign countries, all the risks will be directly transferred to the Chinese company hereof. But once such a structure is employed, all the risks will be separated, which means that the legal risks will be separated between the parent company and the investment destination. This serves as another reason for us to establish such an investment structure.