In today’s global economy, cross-border transactions have become increasingly common, offering opportunities for businesses to expand their reach and diversify their portfolios. For Chinese companies looking to invest in US entities, navigating the legal landscape can be a complex endeavor that can present numerous challenges. Foley partner Eric Chow sheds light on the key legal aspects and strategies for Chinese investors engaging in cross-border transactions with US companies.
We asked Eric to discuss the primary legal considerations and challenges for Chinese companies looking to invest in the USA companies through cross-border transactions, as well as what strategies Chinese should employ to address potential legal and cultural differences when entering into investment agreements or partnerships with US entities. His insights are below.
Heightened Regulatory Approval Process
Aside from the obvious optics and geopolitical considerations, Chinese investors face a heightened regulatory approval process when venturing into the US market. President Biden’s recent Executive Order has underscored the importance of scrutinizing foreign investment, particularly concerning US-China trade relations. Chow advises Chinese investors to take a conservative approach and carefully analyze whether voluntary filings with the Committee on Foreign Investment in the United States (CFIUS) are necessary to ensure compliance and mitigate regulatory risks.
Impact of Corporate Governance and Business Practices
Differences in corporate governance and business practices between the US and China can significantly impact the negotiation and structuring of cross-border transactions. Chow emphasizes the importance of structuring deals to comply with CFIUS regulations, suggesting strategies such as limiting ownership stakes to qualify for passive investment safe harbors. Furthermore, he highlights the need to assess tax exposure and consider alternative deal structures, such as licensing agreements, to optimize outcomes for all parties involved. For example, the parties may wish to structure it to qualify for the passive investment safe harbor by ensuring that the Chinese investor does not own more than 10% of the voting shares.
Unique Legal Challenges in Specific Industries
Certain industries or sectors may present unique legal challenges for US companies investing in Chinese entities. Chow suggests conducting thorough due diligence to mitigate risks related to intellectual property, technology, data privacy, corporate governance, employment laws, and potential litigation. By examining these key legal aspects meticulously, Chinese investors can make informed decisions and safeguard their interests in cross-border transactions.
The Role of Due Diligence
Due diligence plays a pivotal role in cross-border transactions, offering invaluable insights into the target company’s legal standing and potential risks. While definitive agreements may contain representations and warranties, Chow advises against relying solely on these assurances. Instead, he recommends conducting comprehensive due diligence across various legal domains, including IP, corporate governance, background checks, employment practices, and litigation history, to uncover any hidden liabilities or compliance issues.
As Chinese companies explore investment opportunities in the US market, it is imperative to have a full understanding of the primary legal considerations, address cultural differences, and conduct thorough due diligence, in order to mitigate risks, foster successful partnerships, and capitalize on the vast opportunities available in these cross-border transactions.