Distressed M&A: What opportunities and risks under labor law are related with the entry of investors from China?

 More Chinese company acquisitions expected – What SMEs need to know now.

Dr. Jan Tibor Lelley, LL.M. (Suffolk University Law School), Dr. Yuanyuan Yin, LL.M. (Shanghai Tongji Universität)

Distressed M&A: Welche arbeitsrechtlichen Chancen und Risiken birgt der Einstieg von Investoren aus China?

Companies suffering economic difficulties often seek aid from Chinese investors. This gives rise to the question regarding which measures Chinese investors would take to handle the crisis, such as downsizing?

Thus far, the coronavirus crisis has not yet led to an increase in the number of Chinese investors. Concerns about technology transfer due to the acquisition of financially ailing but innovative companies have proven unfounded. Instead, the transaction volume in 2020 was lower than it had been for years. One reason for this is the stricter investment control under the EU screening regulation. In addition, the Foreign Trade and Payments Act has been updated and the Foreign Trade and Payments Ordinance has been amended.

Good experiences thus far

Despite significant reservations, companies have generally had good experiences with Chinese owners. The fear of the influence of the Chinese government is usually unfounded: According to the results of arecent study by the Hans Böckler Foundation,78 percent of acquisitions since 2011 have been made by private Chinese investors. Although company buyers might regard German labor law as inflexible and old-fashioned, massive investments are often made locally to generate growth. Companies were only closed down in very rare cases. Frequently, agreements are made to safeguard locations and jobs and the companies normally retain their operational independence.

Experts expect more investments again

Due to the EU-China Comprehensive Agreement on Investment, concluded on December 31, 2020 experts expect Chinese investments to increase again in the future. The nature of the investments up until now shows an extensive commitment: According to the above-mentioned study, in 173 out of 243 takeovers, Chinese companies acquired the complete shares in the German company. Looking back also reveals that after the end of the financial crisis in 2008/2009, Chinese investors also increased their investments in distressed companies in Germany.

Chinese investors remain interesting partners for mid-sized companies. Companies need to monitor current developments when they consider Chinese shareholders in order to mitigate the economic impact of the corona pandemic. In particular, the suppliers to family businesses, which traditionally prefer to retained their operational freedom and safeguard jobs due to the fact that they have their roots in the region and also a special bond with their employees.