GNW/China Oceanwide: Chinese Foreign Currency Approvals Needed Before Delaware Approves Acquisition, Sources Say
Mon 10/15/2018 14:34 PM
Takeaways
The Delaware Department of Insurance is not likely to approve China Oceanwide’s $2.7 billion purchase of Genworth Financial until the deal is approved by China’s foreign currency regulators, according to sources who are familiar with Delaware’s insurance review process.
As Reorg M&A previously reported, in early September, more than 23 months after they announced their merger, the parties said that geopolitical tensions between the United States and China had delayed China Oceanwide approvals from China’s State Administration of Foreign Exchange, or SAFE, and the National Reform and Development Commission, or NDRC, for moving funds out of China to finance the deal. Both agencies regulate outbound investment. The parties also need approval from the Ministry of Commerce, or MOFCOM, which is now part of the State Administration for Market Regulation, or SAMR.
As a result of the delays in receiving Chinese approvals, the parties have proposed to insurance regulators an alternative financing structure in which Lu Zhiqiang, China Oceanwide’s CEO, will use $1.7 billion of his personal fortune from offshore sources to fund the acquisition. This plan would give the parties until 2020 to obtain the requisite approvals from SAFE and NRDC for the remaining 35%, or $945 million, which will still come from mainland Chinese sources.
The parties state that Chairman Lu will not have recourse to Genworth Financial for repayment of his contributions to the purchase price. The alternative funding structure is shown in Figure 1 below (the parties state that this is a “simplified” flow chart):
A source familiar with Delaware insurance review told Reorg M&A that DOI would be unlikely to approve the merger without certainty that the purchase funds are in place and that the capital contribution is not subject to regulatory risk. The source noted that Commissioner Trinidad Navarro faces a dilemma: on the one hand, if the department does not approve the China Oceanwide deal, it is very likely that there will be substantial premium increases for policyholders of Genworth’s ailing long term care insurer.
On the other hand, the source continued, if the commissioner approves a sale of Genworth to a Chinese company and financial woes arise due to problems in securing Chinese approvals, now or in the future, the premium increases that could be required might be even less palatable to policyholders. Navarro’s term expires in 2020.
According to a legal and insurance regulatory consultant familiar with the Form A process, Delaware could conditionally approve the Genworth/China Oceanwide deal before China, but the clearance would probably be conditioned on Chinese approval. “If China isn’t going to approve [the deal], it can’t go forward,” the consultant said.
A spokesperson for Genworth noted that that with respect to regulatory approvals, Genworth has taken the lead on U.S. approvals, and China “Oceanwide has taken the lead on Chinese regulatory approvals.” As a matter of policy, the company does not comment on the regulatory processes themselves.
The parties have consistently demonstrated a willingness to extend the termination date for their deal, with the sixth waiver in August pushing the termination date to Dec. 1. Therefore, timing risk, in and of itself, should be viewed as relatively low given previous practice.
There is also question of whether DOI will hold a hearing on the merger. In 2017, Delaware Insurance Commissioner Trinidad Navarro issued a release stating definitively that he would hold a public hearing. However, in 2018, the commission altered that commitment, saying it would hold a public hearing “if appropriate.”
Vincent Ryan, senior advisor to Navarro at the Delaware Department of Insurance, told Reorg M&A that he could not comment on whether there would be a hearing, but the sources said they continue to believe that one will be held.
Should DOI determine to hold the hearing, there is a non-waiverable statutory requirement for a minimum of twenty days have to elapse between notice and the hearing date.
In addition to DOI, the parties need U.S. approvals from Virginia’s Bureau of Insurance and the New York Department of Financial Services. In addition to SAFE and NDRC, the parties still need approval from China’s Ministry of Commerce (or the successor agency at the State Administration for Market Regulation).
Reorg M&A’s previous coverage of this transaction can be found HERE.
--Andrew Lowenthal and Alexandra Wilts
- Sources tell Reorg M&A that the Delaware’s Department of Insurance, or DOI, is unlikely to approve China Oceanwide’s acquisition of Genworth Financial until the parties obtain long-delayed clearances from China’s foreign currency regulators.
- The parties announced in early September that, more than 23 months after the merger announcement, China Oceanwide has not yet been able to obtain Chinese approvals for moving the purchase funds out of China. Consequently, as Reorg M&A previously reported, the parties have proposed to insurance regulators an alternative financing structure in which Lu Zhiqiang, CEO of China Oceanwide, will use $1.7b of his personal fortune from offshore sources to fund the acquisition, with $945m still needing to come from mainland China.
- In addition to funding the purchase, China Oceanwide has made commitments in the regulatory filings to add an additional $1.5b in capital by 2020. The parties, in the public filings, have not specified exactly how the new capital is to be used by Genworth. Again, DOI will likely need to know that Chinese authorities have given permission for the transfer of funds even if the contributions themselves will not occur until after the deal closes.
The Delaware Department of Insurance is not likely to approve China Oceanwide’s $2.7 billion purchase of Genworth Financial until the deal is approved by China’s foreign currency regulators, according to sources who are familiar with Delaware’s insurance review process.
As Reorg M&A previously reported, in early September, more than 23 months after they announced their merger, the parties said that geopolitical tensions between the United States and China had delayed China Oceanwide approvals from China’s State Administration of Foreign Exchange, or SAFE, and the National Reform and Development Commission, or NDRC, for moving funds out of China to finance the deal. Both agencies regulate outbound investment. The parties also need approval from the Ministry of Commerce, or MOFCOM, which is now part of the State Administration for Market Regulation, or SAMR.
As a result of the delays in receiving Chinese approvals, the parties have proposed to insurance regulators an alternative financing structure in which Lu Zhiqiang, China Oceanwide’s CEO, will use $1.7 billion of his personal fortune from offshore sources to fund the acquisition. This plan would give the parties until 2020 to obtain the requisite approvals from SAFE and NRDC for the remaining 35%, or $945 million, which will still come from mainland Chinese sources.
The parties state that Chairman Lu will not have recourse to Genworth Financial for repayment of his contributions to the purchase price. The alternative funding structure is shown in Figure 1 below (the parties state that this is a “simplified” flow chart):
Figure 1
(Source: Genworth Financial, China Oceanwide Form A supplement)
A source familiar with Delaware insurance review told Reorg M&A that DOI would be unlikely to approve the merger without certainty that the purchase funds are in place and that the capital contribution is not subject to regulatory risk. The source noted that Commissioner Trinidad Navarro faces a dilemma: on the one hand, if the department does not approve the China Oceanwide deal, it is very likely that there will be substantial premium increases for policyholders of Genworth’s ailing long term care insurer.
On the other hand, the source continued, if the commissioner approves a sale of Genworth to a Chinese company and financial woes arise due to problems in securing Chinese approvals, now or in the future, the premium increases that could be required might be even less palatable to policyholders. Navarro’s term expires in 2020.
According to a legal and insurance regulatory consultant familiar with the Form A process, Delaware could conditionally approve the Genworth/China Oceanwide deal before China, but the clearance would probably be conditioned on Chinese approval. “If China isn’t going to approve [the deal], it can’t go forward,” the consultant said.
A spokesperson for Genworth noted that that with respect to regulatory approvals, Genworth has taken the lead on U.S. approvals, and China “Oceanwide has taken the lead on Chinese regulatory approvals.” As a matter of policy, the company does not comment on the regulatory processes themselves.
The parties have consistently demonstrated a willingness to extend the termination date for their deal, with the sixth waiver in August pushing the termination date to Dec. 1. Therefore, timing risk, in and of itself, should be viewed as relatively low given previous practice.
There is also question of whether DOI will hold a hearing on the merger. In 2017, Delaware Insurance Commissioner Trinidad Navarro issued a release stating definitively that he would hold a public hearing. However, in 2018, the commission altered that commitment, saying it would hold a public hearing “if appropriate.”
Vincent Ryan, senior advisor to Navarro at the Delaware Department of Insurance, told Reorg M&A that he could not comment on whether there would be a hearing, but the sources said they continue to believe that one will be held.
Should DOI determine to hold the hearing, there is a non-waiverable statutory requirement for a minimum of twenty days have to elapse between notice and the hearing date.
In addition to DOI, the parties need U.S. approvals from Virginia’s Bureau of Insurance and the New York Department of Financial Services. In addition to SAFE and NDRC, the parties still need approval from China’s Ministry of Commerce (or the successor agency at the State Administration for Market Regulation).
Reorg M&A’s previous coverage of this transaction can be found HERE.
--Andrew Lowenthal and Alexandra Wilts
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