or lenders from China. First, equity co-investors, if they
intend to deploy capital from China, must go through the
same outbound approval process as the lead investor. Yet
China’s regulators may view a co-investor’s investment
more critically than they view the lead investor’s -- for
example, if the investment is outside of the co-investor’s
core industry or if the co-investor is a newly-formed special
purpose vehicle. Thus the co-investor’s participation in
a transaction can raise the overall risk level of a project,
even when the co-investor is willing and financially able to
make the investment.
Second, Chinese lenders, when committing to provide
debt financing, are generally unwilling to provide the
same degree of certainty as non-Chinese lenders that they
will fund their commitments. Debt commitment letters
from non-Chinese lenders typically set forth the material
terms of the financing and a limited set of conditions to
the lender’s obligation to fund. Whether such conditions
-- such as the non-occurrence of a material adverse event
-- are met is out of the lender’s control. Such letters are
heavily negotiated and can run 30 pages or more in length,
and market participants have a high degree of confidence
they will be performed according to their terms.
Commitment letters from Chinese lenders, on the other
hand, generally make simple commitments to fund
the proposed transaction. Such commitments may be
subject to factors within the bank’s control, such as their
further due diligence review or credit committee approval.
The letters may be silent on the terms of the funding, other
than the amount to be lent, thus raising the possibility that
the funding will be offered, but on terms that render the
transaction uneconomic for the borrower. And, given the
limited number of potential lenders in China, lenders are
unlikely to suffer significant reputational harm if they fail to
fund their commitments.
RISK ALLOCATION
Transaction agreements for Chinese outbound investment
generally address the risks associated with third-party
financing as follows: The buyer will represent at signing that
the applicable commitment letters are in effect and that, if
the financing is made, it will have sufficient funds to close
the transaction. The buyer will agree to use its reasonable
best efforts to obtain the financing described in the
commitment letters and, if such financing is unavailable, to
seek alternative financing. The buyer’s obligation to close
the transaction will not be conditioned upon it having
received the initial or alternative financing. The target will
have a unilateral right to terminate the transaction and to
require the buyer to pay a reverse termination fee if the
buyer fails to close the transaction despite all of the buyer’s
conditions being met and the target certifying that it is
willing to close.
If the buyer fails to close a transaction because of a financing
failure, many agreements make clear that the target
cannot sue for specific performance to force the buyer
to close. Rather, the target’s only recourse will be either to
enforce the buyer’s covenant to seek alternative financing
which the buyer still may not obtain or to terminate the
agreement and to collect the reverse termination fee.
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