CHINA Law and Practice Contributed by: Jeff Liu, Jeanette Wang, Yulong Lai and Yun Bi, Shihui Partners
(d) State-owned asset approvals: Consent from the SASAC is required for transactions involv - ing state-owned enterprises (SOEs). (e) Outbound/inbound investment: For Chinese acquirers, overseas direct investment filings with the NDRC, the MOFCOM and the State Administration of Foreign Exchange are neces - sary. (f) Other: For certain restricted sectors, eg, finan - cial industry, approvals from sector-specific regulators may be needed (see 6.1 Regulated Sectors Requiring Approval ). • Litigation-related outcomes: (a) Resolution of specific material litigation: Final and favourable court judgments or arbitral awards for any high-risk pending litigation iden - tified during due diligence. (b) No material adverse effect: Absence of pend - ing/threatened litigation reasonably expected to cause a material adverse effect. (c) No new material claims: No new litigation threats posing significant liability. Long-stop dates and outside dates are negotiated based on the complexity of the conditions precedent and expected regulatory timelines. A period of three to six months from signing is standard, which may be extended for complex cases. Where prolonged regulatory review is anticipated (eg, for antitrust clear - ance), a separate, later outside date may be set. Key negotiations typically cover unilateral extensions, the permitted number of extensions, and cost allocation. If a regulatory filing remains pending by the agreed date, parties may agree on “best efforts” obligations or extension rights for pending approvals. The final design of these terms will depend on the transaction structure, governing law and the parties’ respective bargaining power. 7.2 Efforts Standards and “Hell or High Water” Clauses In PRC M&A, “reasonable best efforts” or “best efforts” are standard for obtaining approvals and defending challenges under the regulatory approvals. These require parties to take all reasonable steps, such as submitting filings promptly and co-operating with the regulatory authorities’ inquiries.
“Commercially reasonable efforts” is similar to “rea - sonable best efforts” but may place greater emphasis on the reasonableness of actions from the obligated party’s own commercial standpoint. In practice and judicial interpretation, its standard of rigour is some - times viewed as slightly lower than that of “reasonable best efforts”, though the distinction can be subtle. In many transactions, the two terms are often used interchangeably or considered to impose substantially similar obligations. “Hell or high water” represents the strictest and most absolute standard of obligation. The obligated party is required to fulfil its duties at all costs regardless of obstacles or difficulties. However, in PRC M&A practice, such an extreme standard is not commonly adopted. Transactions tend to favour “best efforts” commitments to avoid unlimited liabilities. 7.3 Risk Allocation Mechanisms Allocation of regulatory and litigation risks in PRC M&A aims to balance transaction certainty, price protection and risk‑bearing costs. The final structure reflects each party’s bargaining power, risk appetite and deal urgency. • PRC deals frequently involve a substantial deposit paid at signing. If the deal fails due to the buyer’s breach or financing failure, the seller typically retains the deposit. • “Reverse break fees” are also widely used, espe - cially in cross-border deals involving major regula - tory approvals (eg, antitrust or foreign investment review). The fees are often secured in escrow due to foreign exchange controls and are triggered if the buyer fails to obtain key approvals or fails to consummate the closing. • Price adjustments further allocate specific risks by linking future financial impacts (eg, lawsuit out - comes) to the final consideration. Operationally, price adjustments are implemented post-closing through deductions from an escrow account or direct seller indemnification, based on final adjudi - cated liabilities or settlement costs. Buyers typi - cally require such provisions to shield themselves from unforeseen liabilities, while sellers negotiate to limit exposure by introducing thresholds or caps, or arguing that risks were already priced in.
39
CHAMBERS.COM
Powered by FlippingBook