CHINA Law and Practice Contributed by: Lingyun Dai, Tao Liu, Xueyong Liao and Yuzhou Shang, Lifeng Partners
Whether a transaction typically depends on third-party consent also depends on the nature of the target com - pany’s business. For example, for a company with a “business to business” model, where a few major cli - ents play a crucial role in the business, if these major clients are hostile to the acquirer, the business would struggle to operate even after the acquisition. In such cases, the M&A transaction would require the consent of these key third parties. 6.5 “Hell or High Water” Undertakings Accepting a “hell or high water” undertaking is exceedingly rare. Irrespective of the type of transaction, due to the fiduciary duties owed by private equity firms to their LPs, private equity firms are inherently cautious about assuming liabilities. Even in the face of man - datory regulatory conditions, such as the notification requirements under China’s Anti-Monopoly Law for concentrations of undertakings, private equity firms will not assume an obligation as extreme as “hell or high water”. At most, they may undertake a “best Given that the seller is obligated to sell at a good price, when the seller is in negotiations and another buyer presents a better offer, if the buyer wishes to terminate the original negotiations, they are required to pay a break fee to the original buyer. Both break fees and reverse break fees are encoun - tered. The amounts ranges from 4% to 10% of the transaction value. 6.7 Termination Rights in Acquisition Documentation The conditions triggering termination include: (1) the transaction has not been consummated prior to the longstop date; (2) the failure to obtain the required third-party approvals (including those from govern - mental authorities, shareholders’ meetings, boards of directors, etc); and (3) a material breach by the coun - terparty. efforts” obligation. 6.6 Break Fees The specific longstop date is contingent upon the cir - cumstances of the particular transaction, with dura -
tions of six months, eight months or 12 months being common. 6.8 Allocation of Risk The allocation of risk is distinct where the seller or buyer is private equity-backed. Where the seller or buyer is a private equity firm, they are highly cautious about risk and cannot assume excessive liability for indemnification or guarantees. In contrast, where the transaction party is a corporate entity, there is somewhat more flexibility in assuming risk. 6.9 Warranty and Indemnity Protection Private equity funds generally do not provide repre - sentations and warranties, except for fundamental representations/warranties. Whether and how the management team provides representations and war - ranties depends on whether the representations and warranties provided by the target company and its shareholders are sufficient. 6.10 Other Protections in Acquisition Documentation In China, M&A insurance exists in transactions, cover - ing basic warranties and business-related risks, but not tax matters. It is typically provided by insurers. 6.11 Commonly Litigated Provisions Litigation is frequently involved, especially in connec - tion with earn-out clauses. In China’s equity invest - ment and financing market, this typically manifests as the invested company and/or its founders being required to repurchase all or part of the equity held by investors at a specified price if the company fails to meet agreed-upon milestones (such as going public or achieving certain performance targets) within the stipulated time frame.
7. Takeovers 7.1 Public-to-Private
Over the past year, in China’s domestic capital market, transactions involving the change of control of listed companies have been quite active. There are also quite a few transactions supported by private equity
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