By Gary Gao
Foreign buyers are conducting ever-deeper scrutiny of China M&A targets for anti-corruption compliance as they embark on a buying spree in the world’s second largest economy.
In 2014 China saw a record number of deals, and bidders have made compliance with the US Foreign Corrupt Practice Act (FCPA)—one of the most actively enforced anti-bribery laws in the world — a high priority as they conduct pre-purchase due diligence. A full due diligence investigation can last as long as six months in some cases.
“Awareness is rising quickly,” said Kate Yin, a Beijing-based compliance attorney with Fangda Partners. “The more you do business in a country ... like China where corruption risk is high, the more likely you will commit or buy into violations, and the more careful you need to be.”
A key risk for investors is that the FCPA recognizes successor liability—buyers can be held liable for violations committed by the target company pre-acquisition. The US Department of Justice has applied successor liability consistently and broadly, covering even minority stakes or asset purchases in some cases, China-based anti-corruption lawyers told PaRR.
Some of the largest FCPA fines resulted from successor liability, including the 2009 case where Halliburton and KBR were fined more than $400 million over bribes paid to Nigerian government officials to win construction contracts.
Merger and acquisitions by foreign investors on the Chinese mainland and Hong Kong hit a record high in 2014, increasing by 79.9 percent to $38.2 billion year-on-year. The number was $21.3 billion in 2013.
A total of 201 deals were made in 2014, 20 more than the previous year, according to a report by PaRR’s sister publication Mergermarket. US buyers were some of the most active with 55 deals—almost three times the number in 2013.
Skeletons in the closet
Beyond US regulations, increasingly aggressive anti-bribery enforcement by Chinese regulators serves as another incentive for buyers to find all the skeletons in a target’s closet before closing a deal.
China’s anti-corruption laws are now actually broader in scope than the FCPA, according to a recent report on commercial bribery with Yin as the lead author. The report urges foreign companies investing in the fast moving consumer goods and food industries to further strengthen compliance to cope with China's changing enforcement of anti-corruption laws.
China is considering a tenfold increase in fines as allowed by the Anti-Unfair Competition Law, one of the country’s major laws dealing with commercial bribery, a source familiar with the situation told PaRR. Planned changes include forcing violators to disgorge not just ill-gotten profits but revenue as well.
“Compliance with Chinese anti-bribery laws [has] come to prominence in recent years, especially after the landmark GlaxoSmithCline case,” said a Shanghai-based compliance lawyer. British drug maker Glaxo was caught up in a massive bribery scandal in 2013 involving payments to doctors to prescribe drugs that resulted in the Chinese government fining the company nearly $500 million.
“It’s to some extent more complicated than compliance with the FCPA, because China’s enforcement record lacks consistency and the law [is] up to great interpretation,” the lawyer said.
So, when foreign buyers set their sights on Chinese targets the age-old advice remains true—let the buyer beware.
This post is brought to you by PaRR (Policy and Regulatory Report)— a product of The Mergermarket Group providing proprietary intelligence and research on competition law and sector-specific regulatory changes around the world.
Gary Gao is a regulatory reporter at PaRR based in Shangahi. He can be reached at gary.gao@parr-global .com.
