U.S. takeover deal brings foreign relief
Last week's official approval of a United States firm's takeover of Little Sheep Group, a popular Hong Kong-listed Chinese restaurant chain, was seen as an example of fair market competition in China, even though the approval process by antitrust regulators took seven months.
Bing Ho, a Shanghai-based partner of Baker and McKenzie, one of the world's largest law firms, said the deal's clearance could be seen as 'a sign of relief' to investors worried about a possible shift by China to an anti-foreign stance. Ho said overseas investors had been closely monitoring the deal - a bid by Yum! Brands, which owns KFC and Pizza Hut, to proceed with its proposed HK$4.4 billion takeover of Little Sheep, which operates a chain of Mongolian hotpot restaurants. Yum! already owns 30 per cent of Little Sheep.
However, the time it took for Yum! to secure the approval offered no sign that Beijing's anti-monopoly regulators were accelerating their review process. The Ministry of Commerce's small antitrust regulatory division was 'overloaded' with too many proposed merger and acquisition cases, and waiting for approval could be trying for foreign investors in China, said Clara Ingen-Housz, a Baker and McKenzie lawyer, who is familiar with foreign direct investment on the mainland. Lengthy waits for regulatory approval were 'the No 1 challenging issue', much more so than concerns about regulators' prohibition of takeover bids on nationalistic grounds, she said. And there is no telling when the 'traffic jam' will ease up in the mainland's anti-monopoly regime. In fact, in the Yum! case, the Ministry of Commerce said on October 26 that the review period had been extended by 60 days, although it took just two more weeks for clearance to be granted.
Although not an unusual practice for antitrust regulators internationally, a review extension might also reflect the Chinese antitrust regulatory body's lack of staff, relative to the amount of work it had to handle, Ingen-Housz said. She said it was almost impossible for firms to obtain an antitrust decision within 30 days.
While it remains hard to predict how long the waiting period may be for individual cases, Baker and McKenzie lawyers said the most practical steps foreign firms could take were to make good preparations for their proposed merger or acquisition in China. Before launching a formal takeover, Ingen-Housz suggested that foreign firms should 'be proactive in the market', such as by communicating with government officials and industry associations about their plans.
'All levers should be used,' she said. The key was to make their case 'clear and compelling.'
Antitrust law will play a more important role in China as more foreign investment continues to flow into the country through mergers and acquisitions, according to international lawyers with China experience.
Ho said China-bound foreign direct investment remained on the rise, even though many of the government-designed preferential policies to investors no longer existed.
Since the mainland's anti-monopoly law took effect three years ago, the commerce ministry has blocked only one case out of more than 200 it has reviewed. Most cases have been approved, and conditions were set for only seven proposed mergers, mainly concerning the two parties' separate contracts and business practices that already existed in China, Baker and McKenzie lawyers said.
The case that was blocked was Coca-Cola's HK$17.9 billion bid for Beijing-based China Huiyuan Juice Group in 2008 and 2009. Regulators said they blocked the deal purely because of business considerations, and not to protect national interests. Meanwhile, internet pundits have not been short of opinions regarding foreign takeovers. One such pundit said it was heartbreaking to see national brands disappearing one after another.
Additional reporting by Bloomberg
Foreign direct investment in China surged 15.9 per cent in the first 10 months of this year from a year ago to this amount, in US dollars