U.S. Targets Are Asking China Buyers for Prenup Breakup Fees

  • Firms want Chinese buyers to put termination fees in escrow
  • Practice is becoming routine to deal with enforceability risk

U.S. companies are warming to the idea of selling themselves to Chinese buyers. But they’re still taking steps to make sure they’ll be compensated if those deals fall through.

At least three U.S. companies that have recently agreed to sell themselves to Chinese buyers have demanded that a reverse termination fee -- known as a breakup fee -- be held in an escrow account. The request, which is “becoming common practice,” according to Chuck Comey, an M&A lawyer at Morrison & Foerster LLP, speaks to a lack of security when doing deals with Chinese firms.

U.S. targets want to ensure they can collect millions of dollars from Chinese suitors in the event that a deal is blocked by regulators. Capturing fees if a takeover is canceled may be difficult for U.S. firms, who have limited transparency into how businesses in China operate. Assuming termination fees will be paid -- and paid on time -- is a risk that companies are increasingly unwilling to stomach, Comey said.

“It’s a mechanism to deal with enforceability risk,” Comey said.

Ingram Micro Inc., which agreed last week to sell itself to an arm of HNA Group Co., plans to enter into an escrow agreement with Deutsche Bank AG’s Trust Company Americas to house $400 million, according to a company filing. The money will be paid by the Chinese buyer in installments over the next two months, and will be held until the deal closes. If the Committee on Foreign Investment in the U.S. or other regulators block the deal, Ingram Micro will keep the money.

The move comes amid unprecedented activity by Chinese buyers. After just 53 days of the year, Chinese companies have announced $79.4 billion in outbound deals -- more than 60 percent of 2015’s total of $131.7 billion.

Multi-Fineline Electronix Inc., an Irvine, California-based circuit manufacturer that agreed to be acquired by Suzhou Dongshan Precision Manufacturing Co. for about $584 million this month, also asked for termination fees to be held in escrow. So did Milpitas, California-based Integrated Silicon Solution Inc., which was sold to a Chinese consortium backed by Summitview Capital, Beijing E-Town International Investment & Development Co. and Hua Capital for about $791 million last year. Breakup fees are typically between 1 percent and 3 percent of the total deal value.

The safeguarding isn’t limited to escrow accounts. As part of China Resources Microelectronics Ltd. and Hua Capital’s failed bid for Fairchild Semiconductor International Inc., the target company asked its suitors to guarantee a“waiver of sovereign immunity and establish a process agent in the U.S. for the receipt of legal service,” according to a regulatory filing.

The trend to hold termination fees in escrow has coincided with, but isn’t necessarily related to, more active opposition to deals from CFIUS, Comey said. Royal Philips NV canceled its planned $2.8 billion sale of its lighting-components unit to a consortium led by GO Scale Capital of China because of regulatory opposition last month.

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