Special aspects of negotiating with German medium-sized businesses for Chinese investors

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last updated on 22 February 2022 | reading time approx. 2 minutes

 

   

What special issues await Chinese companies when they take over or acquire a stake in an owner-managed company in Germany?

Chinese companies play a major role among foreign investors in Germany. In practice, especially investors from China often gain the experience: “Investing is easy, but integrating is difficult”. Due to the different legal and cultural environment, Chinese investors often experience a real “cultural shock”. This happens both when investing in an existing German medium-sized company and when setting up their own company in Germany. 
 
Time and again, it is the peculiarities of German labour law that “surprise” Chinese investors and pose particular challenges to them. Although Chinese labour law is considered to be employee-friendly, many legal regulations in Germany are nevertheless regarded as “extremely generous” from a Chinese perspective. This is reflected, for example, in the statutory holiday entitlement: While a Chinese employer is required by law to grant its employees only 5 to 15 days of holiday leave, in Germany this is usually at least 24 days for a full-time employee. There are also significant differences when it comes to social security, especially considering that social security contributions in China are many times lower than in Germany. This in turn leads to different calculations and expectations regarding personnel costs. In the M&A business, these and other significant differences are already noticeable in the acquisition phase, but it is usually not until the post-closing phase, i.e. after the acquisition of an investment, that a Chinese investor only becomes aware of the far-reaching consequences of those differences in day-to-day operations.  
  

What aspects should Chinese companies take into account when negotiating with German medium-sized businesses?

In addition to taking cultural peculiarities into account, it is essential to draw up a transparent and realistic time schedule at the beginning of an M&A project. In particular, the legal peculiarities in connection with the so-called Chinese Overseas Direct Investments (ODI) should be considered. For a Chinese investor, every investment abroad requires an approval. In the case of an M&A project, this means in particular that a Chinese buyer may not pay the company purchase price owed until all regulatory approvals have been granted by the Chinese authorities. As a rule, at least three different Chinese authorities must be involved in this approval process: Depending on the type of the M&A project, the investor must first obtain an approval or registration from the relevant local authority of the National Development and Reform Commission. Subsequently, the entire M&A project must be approved or registered by the locally responsible office of the Ministry of Commerce. The final step, which concludes the approval process, involves foreign exchange registration. This is the responsibility of the State Administration of Foreign Exchange. In practice, a foreign exchange bank can also take over partial functions in the process. 
 
Chinese state-owned enterprises and listed companies must observe additional requirements. 
 
For a successful M&A process with Chinese investors in Germany, it is absolutely necessary that these special aspects arising from Chinese law are taken into account already at an early stage of the negotiations and when drafting the transaction documents. 
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