Despite efforts by the Chinese government to impose new restrictions on outbound M&A, Chinese investment in the U.S. insurance industry continued steadily in 2016. As a result, parties should continue to pay attention to the issues that both private and state-owned Chinese buyers encounter when investing in U.S. insurance companies.
The continued delay of Anbang Insurance Group’s $1.6 billion acquisition of Fidelity & Guaranty Life underscores a primary concern for sellers and acquirers alike: the ability of Chinese acquirers to obtain timely U.S. regulatory approvals.
Most notably, the U.S. state-based “Form A” change-of-control approvals.
Potential acquirers typically must file an application with U.S. state insurance regulators in the states of domicile of each target insurance company, disclosing a variety of financial and ownership information.
Nearly thirty U.S. states have statutes, many dating back to the mid-1950s, that generally prevent foreign government-owned, operated, or controlled insurance companies from being licensed in those states.
Because the perception remains, whether justified or not, that all Chinese investors have some level of governmental ownership, they should be prepared to prove the lack of such ownership or wall off control from such unknown owners.
Chinese acquirers should be prepared to seek approval from the Committee of Foreign Investment in the United States (CFIUS) for acquisitions of insurance companies that are based in, or sell into, the U.S., particularly if the target does business involving the U.S. federal government or its employees.
The importance of a potential Chinese acquirer’s increased vigilance in sell-side due diligence regarding regulatory preparedness cannot be overstated; regulatory applications should contain sound business plans and transparent disclosures regarding the acquirer’s ownership structure.
Sellers should review completed Form A applications, and the definitive purchase agreement should require the prompt filing of the reviewed applications. Moreover, sellers need to consider requiring a Chinese acquirer to represent and warrant both as to the accuracy and completeness of the relevant draft applications.
Notwithstanding recent transactions to the contrary, reverse-termination fees tied to U.S. insurance regulatory approvals are rare, and there are few, if any, examples of such fees in insurance M&A practice.
Practitioners typically have viewed divestiture covenants as less practical in insurance M&A transactions given the low likelihood that a deal will raise competition concerns. However, divestiture covenants in transactions where the target has insurance (or other) businesses with direct links to the U.S. government or government employees may be beneficial given the likelihood of CFIUS review.