When deals go bad: China state firm managers spooked by new liability rules

Mon Sep 26, 2016 7:07pm EDT
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By Denny Thomas and Michelle Price

HONG KONG (Reuters) - Business development managers at Chinese state-owned firms have been put on notice: mess up on M&A deals and you can be held personally liable - for life.

Under new rules unveiled by China's State Council, or cabinet, last month, managers will be held accountable if they "fail to, or incorrectly, perform their duties" with respect to deals that result in a loss of state assets.

A lack of specifics has prompted bankers and lawyers to say this is a draconian catch-all clause that is already slowing deal-making at Chinese state-owned enterprises (SOEs).

Sanctions include pay cuts, disciplinary action or full judicial hearings - even years after managers have moved jobs or retired. In the United States and Europe, company executives are rarely held personally accountable, let alone criminally liable, for bad deals - provided they met their fiduciary duties. When strategic moves go bad, typically the CEO or chairman is urged to resign.

The move is part of President Xi Jinping's overhaul of China's bloated, debt-ridden SOEs, which have been on a buying binge in recent years. Sloppy deal-making has led to billions of dollars in writedowns.

Flush with state funds and a government mandate to go global, SOE managers have enjoyed a high degree of freedom to make often big, headline-grabbing outbound deals without fear of personal reprisal.

In the rush to accumulate assets, business development teams weren't always thorough in their due diligence or market analysis. And deals were typically rubber-stamped by boards that tended not to look too closely at the details or valuations, said bankers and lawyers who have worked on state sector deals.

State firms also paid less attention to integrating newly bought assets - often critical to delivering long-term value.   Continued...

Security personnel stand next to snowmen at the entrance of China National Offshore Oil Corp (CNOOC) office tower in Beijing, March 20, 2013. REUTERS/Petar Kujundzic/File Photo