On February 15th, 2017, Zhongyin Law Firm held a conference on the theme of “Chinese Enterprise Merger Risk Solution”. The meeting invited Ping An Insurance Deputy General Manager of high-end Liability Insurance Division Mr. Ren Xiaoqiang to share the innovation practices and advanced experience in the terms of mergers and acquisition and reverse breakup insurance. Our firm’s CMC member and senior partner Nian Penghe, Chen Yongxue, senior partner Wu Zetao, and other decade lawyers engaged in domestic and foreign mergers and acquisitions business, attended this meeting.

The followings are parts of the highlights of Mr. Ren Xiaoqiang’s share:

[M & A Insurance Break Up the Deadlock]

Mergers and acquisitions insurance has successfully landed ten years ago, the purpose is to resolve the transaction risk of buyers or sellers, and provide guarantee for the risk of compensation for breach of contract in the contract of merger and acquisition. For example, after the completion of the delivery, if the information disclosed by the seller is not in conformity with the facts, the buyers could get a certain amount of compensation according to the purchased insurance, in order to achieve risk transfer.

Erenow, enterprises are through the establishment of funds charge account deposit to prevent risk. The disadvantage of margin system is that buyers and sellers can’t reach a consensus for margin level and the length of time to freeze funds.

[Reverse Breakup Fee Insurance Is Ready]

Beginning in the second half of 2016, in order to prevent the risk of approval of U.S. CFIUS, various types of mergers and acquisitions involved in the case of the reverse breakup fee. Internationally, mergers and acquisitions insurance designed for CFIUS’s approval risk landed less than two years, just realized the process from guarantee to policy. In 2016, U.S. companies required several Chinese companies in overseas mergers and acquisition transactions, to arrange of reverse breakup fee insurance. According to the data display, from 2016 October, reverse breakup fee has gradually become a rigid demand in mergers and acquisitions. In the first quarter of 2017, Ping An Insurance will introduce the insurance that multilateral approval risk as the core and multilateral trigger conditions.

[Mergers and Acquisitions Insurance Provides Protection for Common Transaction RIsks]

M&A insurance is introduced from USA, if the transaction takes place in America, the seller’s agreement will require arrangements for mergers and acquisitions insurance for 90% possibility. In addition to USA, Germany, UK and other developed countries in Europe and Australia, the mergers and acquisitions insurance market is relatively mature.

With the advent of the 2.0 of Chinese enterprises going out, and the promoting of “Belt and Road” policy, Chinese enterprises’ demand for mergers and acquisitions risk solution is increasing.

According to Mr. Ren Xiaoqiang, the merger company’s financial statements, tax, business and intellectual property risk has become a high incidence of mergers and acquisitions default, employment is also one of the most recent acquisitions risk.

From the latent period of risk, within a year and a half after the delivery, is the peak of mergers and acquisitions risk outbreak, insurance companies will determine the risk based on the SPA (share purchase agreement) content. Under the normal circumstances, the protection period is 5-7 years. In practice, each piece of information disclosed behind will match a term of protection period, the longest is 7 years.

[Mergers and acquisitions Risk With Chinese Characteristics]

From the perspective of Chinese characteristic risk, foreign PE comes to China to acquire quality assets, usually arranging to buy foreign insurance company’s acquisition policy, however, foreign M&A insurance eliminate some of the Chinese characteristic risk. Mr. Ren Xiaoqiang thinks can make the transaction smoothly through the insurance way solving the questions that what seems to be a risk but not a risk.

[What Could M&A Insurance Do for Mergers Enterprises]

For buyers, mergers and acquisitions insurance can meet the judicial needs of dispute resolution, improve solvency determination, maintain relationship with company management, meet the tender requirements, improve bargaining power, and make the mergers and acquisition process go on smoothly.

For sellers, it is convenient to facilitate the seller clean exit after the completion of the transaction, and reduce potential legal liability.