Law Related Financing issues in overseas investment, survival of enterprise
The financing problem in overseas investment is equivalent to the survival problem of the enterprise after cross-border investment. For example, the military should abide by the law of war, “soldiers and horses are quiet while food goes first”. As a result, it will not be able to develop in a good direction. In general, the sources of army food for overseas investment by companies usually include their own funds or bank loans. Loans can include financing from both domestic and overseas sources. How to use financing to ensure that cross-border companies truly gain a foothold is the most important point.
1. “Procedures for obtaining military rations”-letter of intent for bank financing
Financing issues should generally be resolved as soon as possible. In transactions, overseas sellers will absolutely require the acquirer to prove that they have sufficient financial resources to conduct overseas acquisitions. Generally, companies are required to issue a comfort letter or bank financing letter of intent under international standards in accordance with international transaction practices. But here comes the problem. In the process, the situation often encountered is whether the letter of intent issued by the bank will block the mouth of foreign investors if the acquirer decides to raise funds from a domestic bank.
According to some articles and feedback from practical lawyers, domestic banks have relatively few overseas investments, and the commitments they can make are relatively simple, and many conditions are attached.
For example, overseas investment can only be obtained when all domestic approvals are obtained or the head office is approved. Sign a formal agreement, etc.
In this way, the content and strength of the commitment letter will be less influential and may not be sufficient to meet the requirements of overseas institutions.
Then, in this case, it is necessary to brazenly discuss with the bank how to provide support to the greatest extent, whether it is possible to sign a letter of intent on terms before the National Development and Reform Commission and the Ministry of Commerce approve, as far as possible to require the main terms of the financing loan in the letter of intent to be able to express some deterministic content, including the main loan conditions such as loan amount, loan period, interest, and substantive content such as withdrawal conditions.
2. How to Cope with the Situation of Soldiers and Horses-the connection of financing and approval and transaction process?
In the process of handling banking financial cases, it gradually became clear that the loan procedures announced by domestic banks have strict credit and loan review systems, and separate departmental supervision procedures.
Compared with the overseas M&A loans involved, the total amount of loans will definitely be exceeding the approval authority of the provincial bank where the domestic enterprise is located is likely to require approval from its head office.
In this case, there are not only the connection of domestic approval and overseas transaction negotiation, but also the connection of all domestic work including financing.
If the domestic acquirer is not a mature enterprise that frequently conducts cross-border transactions, it may not have sufficient knowledge and ability to coordinate one or even multiple banks to provide timely documents required by the overseas seller to prove its financial ability, including support letters, commitment letter, or terms and conditions or even the final bank agreement.
This workload is huge, especially when the pace of an overseas project is very tight, the exclusivity period is very limited, and the real substantive work is nearing completion. Poor coordination will affect the entire approval process and the progress of overseas negotiations with sellers. This is one of the biggest problems that are often encountered in overseas investment projects.
3. “Transportation of Grain”-the way that funds go abroad after financing
Finally, how to arrange to leave the country after obtaining the relevant funds approved by the bank is another big problem. Generally, for the bank loan obtained by the project and the company’s own funds, overseas sellers will require a commitment letter in different forms.
The bank’s part is for the bank to issue a letter of commitment for loan funds, and the company’s own part requires the company to issue a letter of commitment and additional bank deposits. Proof, to prove that the company has good cash flow and deposits to invest. When the funds go out, the options available are:
The method of investing in the establishment of a subsidiary and then acquiring it by the subsidiary (you can consider Hong Kong, Cayman, Singapore and other places, the advantage lies in the tax incentives for capital outbound).
The method of directly acquiring the equity of an overseas company (method of merger and acquisition).
Loans to overseas subsidiaries and then acquisitions by subsidiaries.
Each of the above methods has advantages and disadvantages. In particular, it needs to be pointed out that going out in the form of loans to overseas subsidiaries needs to meet the procedures and substantive requirements stipulated by the SAFE.
4. Common financing methods
I talked about the issues that should be paid attention to and valued in financing, so it is time to focus on what methods are available in financing. This should be regarded as the most concerned part of the acquirer.
Credit financing and asset financing
There are currently two types of acquisition financing internationally: Credit financing and asset financing. If it is based on the credit of the borrower, it is a credit financing.
If it is based on the target company’s assets and cash flow, it is an asset-based financing. Overseas acquisitions generally adopt asset-based financing. But like some state-owned enterprises of the “national character” when they are financing overseas acquisitions, state-owned banks are very generous and basically rely on the reputation of the central enterprises. Based on the credit of the borrowing company’s own credit loans, first of all, from the perspective of the bank, risks are not properly controlled.
The guarantee of the source of repayment is based on the assets and cash flow of the target company, so it should be an asset financing rather than a credit loan. If it is based on the borrower’s credit financing, the debt is reflected on the borrower’s balance sheet.
If you always rely on your own credit for financing, then there is no doubt that the balance sheet will be quite ugly. If you can completely rely on the target company’s assets for guarantee, its financing capacity will also be enhanced.
Asian lawyers should try their best to help companies use international capital for financing in the process of overseas acquisitions. How to make financing as stable as possible is a relatively large role for lawyers in cross-border acquisitions?
Guarantee of asset financing
When the financing framework of overseas mergers and acquisitions is designing asset-based acquisition financing, the most important thing is how to set up guarantees on the assets of the target company.
Due to China’s foreign exchange control, it is very difficult for domestic companies to provide guarantees for overseas companies.
However, the situation is different when Chinese companies go overseas to purchase. If asset guarantees can be designed, it can improve the financial situation and reduce debt pressure for domestic acquirers.
There is also a very critical issue in acquisition financing, that is, the issue of financial assistance. If the acquiree is a listed company, it cannot use its own assets and resources to facilitate the acquisition of the company’s financing by the acquirer, because this is equivalent to using the company’s assets for financing.
The convenience provided by the acquirer is an infringement of rights for all small and medium shareholders and other shareholders of the acquiree.
Of course, financial assistance is not absolutely forbidden, and there are exceptions in some places. If financial assistance is provided for legitimate reasons, it is okay. For example, by convening an extraordinary general meeting of shareholders, the general meeting of shareholders approves that the acquisition is beneficial to the company. it is also fine.
Guaranteed within and outside
In the financing process of overseas acquisitions, the source of funds can also be resolved through internal guarantees and external guarantees, such as borrowing money from banks and providing guarantees by domestic companies.
There are two methods of internal guarantee and external guarantee: First, the domestic parent company directly provides guarantees to overseas financing parties.
According to the current regulations, the domestic parent company can only provide guarantees for the overseas liabilities of overseas subsidiaries, and such guarantees require the approval of the SAFE.
The second is that the domestic parent company applies to a domestic financial institution to open a standby letter of credit, which directly guarantees the overseas borrowings of overseas subsidiaries.
Since the domestic financial institution has an approved amount of external guarantee every year, the standby letter of credit is issued within the bank’s external guarantee line, the SAFE does not require approval on a case-by-case basis.
But banks usually require companies to provide counter-guarantees. The enterprise can choose one of the above schemes to arrange the guarantee scheme according to its own situation.
As mentioned above, financing is always the most important part of a company’s overseas investment, and there is no one. A foodless army will definitely not be able to fight a protracted battle. When mergers and acquisitions touch overseas, capital is even more of a “military ration” for companies to courage, giving not only a sense of security, but also a sense of confidence.
Name: Ajay Rastogi
Educational Qualification: LLB
Profession: Advocate / Lawyer
Work Experience: 20 Years of Legal Practice
Profile Link: https://lawjc.com/members/advajayrastogi/