Five tips: Chinese acquisitions

Whether your firm is urgently seeking a white knight or simply looking for an injection of cash to boost development, China offers considerable inward investment opportunities.

But to ensure your agreement runs smoothly, there are several things you should be aware of.

  1. Buyer beware
    In the UK, the principle of caveat emptor – “let the buyer beware” – is usually held to apply to transactions between businesses unless it can be shown that the seller had a clear information advantage over the buyer that could not have been removed by carrying out reasonable due diligence. This means, unlike in China, a common law court will not retrospectively alter the purchase price for a company on the basis of fairness.
  2. Due diligence
    The existence of the “buyer beware” principle in English law means that Chinese buyers will want to learn as much as possible about their target company to fully understand what they are taking on. Due diligence is conducted before both parties sign and share the purchase agreement. It is conducted in three areas: commercial, financial and legal. If it appears there are future liabilities involved, the buyer could, for example, obtain a warranty from the seller or negotiate a price reduction.
  3. Asset or share purchase?
    In an asset purchase, only the assets are acquired, with liabilities remaining with the current business owner. In contrast, a share sale sees all liabilities as well as all shares and assets passing to the buyer. Whichever method is chosen, the seller will have to pay capital gains tax (CGT) on any gain when the company or assets are sold. In general, the rate of CGT is between 18 and 28 per cent. There are various ways to reduce the amount of CGT payable, such as the target firm paying dividends before the sale. The buyer pays stamp duty at 0.5 per cent of the purchase price of the shares.
  4. Tier one investment visa
    In February 2014, the UK government increased the amount tier one applicants had to invest in UK private or public companies from £1 million to £2 million. Applicants are permitted to invest the £2 million into a company, retain the current managers so the business can continue performing as well to prevent breaching employment laws. The applicant can then choose whether to work at that company, work elsewhere or even study.
  5. Liabilities
    If the target company is involved in litigation, an estimate of the largest possible compensation sum should be obtained. Special care should be taken with existing employees, who can claim against the old and/or new employer unless dismissed for a genuine redundancy. Employees dismissed before the business transfer must claim against the old employer, while those dismissed after claim against the new employer.