Member Article

Accessing the lucrative market of Macau is on every foreign investor’s radar. Though challenges regarding corporate structure and registration, real estate, employment, litigation and licensing appear intimidating, a good understanding of local practice ensures a smooth and solid transaction.

The Chinese gaming enclave of Macau has experienced another boom last year, far beyond analysts’ wildest dreams. Gaming regulators announced that the casinos had taken in more than US$45 billion (Rmb282 billion) in 2013 – a nearly 20% jump over the previous year. In this economic environment alongside a simple and low tax system, it is no wonder that the interest of foreign investors in Macau is equally booming, with many choosing to enter the market by acquiring existing businesses.

Mergers and acquisitions are operations that, if successful, may propel the business to new heights. In many cases, they represent the most efficient way to expand or to consolidate a business in the Macau market. However, along with such opportunities come risks associated with these transactions that a potential investor should be aware of.  Such risks are not simply related to financial issues assessed through the seller’s audited financial statements and balance sheets.

The investor’s attention should place equal focus on legal and regu­latory matters when deciding to acquire a business. For example, the existence of pending court proceedings, unlawful agreements and expiring governmental licences may lead to major liabilities and may even impair the future operation of the business. Beyond this, it is important to have a good understanding of the local practices and customs. There are often significant cultural differences and incompatibilities between the overseas investors and the local business people that could make it more challenging to negotiate a successful deal. In addition, as a large number of investors originate from common law systems, the understanding of Macau’s legal system can sometimes be challenging, given that Macau’s legal system, having Portuguese law as its main reference, belongs to the civil law tradition originated in continental Europe. It is therefore essential to have a sufficiently deep and broad understanding of these issues before delving into an acquisition – not only to make an informed decision but also to have a proper valuation. To do so requires conducting thorough due diligence on the target business, which involves retaining lawyers in Macau and is normally complemented with financial audits.

Corporate Structure

Understanding the corporate structure of the target business is essential. Primarily, it provides the investor with important infor­mation for choosing the right acquisition method. Knowing the legal nature of the target company helps the investor to select the right approach, as the procedures and formalities may vary depending on the type of company.

There are several ways to perform a merger and acquisition in Macau. Such arrangements may include the transfer of all the assets from one company to another (amalgamation), the winding-up of the companies involved in the operation followed by a transfer of all their assets to a newly incorporated company (consolidation), share acquisition or transfer of all or part of the business from one entity to another, involving the transfer of all assets, obligations, duties and rights related with the transferred business (transfer of undertaking).

Accessing information on companies in Macau is not a par­ticularly arduous task, as most corporate entities are subject to registration with the Macau Companies Registry – whose main purpose is to make available to the public the status of entrepre­neurs (whether natural or legal persons) and businesses, thereby guaranteeing the certainty and security of commercial transactions. Furthermore, there is a legal presumption that registration records are true and accurate, being effective against third parties. When conducting company searches in Macau, it is possible to obtain several details – former and current – such as the identity of shareholders and respective shares, directors, business purpose, articles of association, encumbrances and certain pending court proceedings that may impact the company’s value. This gives an important overview of the target business and helps to avoid certain pitfalls, such as acquiring shares that are subject to limitations that affect their ability to be disposed of. However, it is important to note that the registration of busi­nesses (which are not legal persons) and individual entrepreneurs ceased to be mandatory. In this case, it is essential to protect the position of the investor by means of representations and warranties from the seller in the contractual arrangements. This also applies to certain facts that are not subject to registration (even in the case of legal persons) and that may affect the success of the transaction. For example, although not frequent, there may be shareholders’ agree­ments (not publicly available) establishing special conditions or restrictions to the transfer of shares to third parties that potentially may render the transaction void and ineffective if not observed.

In addition to the publicly available records in the Companies Registry, it is always important to review all corporate documentation of the target business, such as minutes of share­holders’ meetings and of board of directors’ resolutions. This also gives an interesting perspective on the path that the business has been following since its incorporation and on its values and market positioning.

Real Estate

Real estate due diligence in Macau, in general, is simplified by the fact that most rights over properties are subject to registra­tion with the Macau Property Registry. This registration system (a Torrens title registration system), similarly to the commercial one, is intended to make available to the public the status of properties and any interests registered against the same so as to guarantee the security of transactions.

Notwithstanding, there are certain particularities in Macau that must be considered. The large majority of land in Macau is held under leasehold granted by the Government for a certain period of years. With such leasehold, initially provisional, the developer becomes bound to certain obligations – essentially, developing the land with the construction of buildings or infrastructure within a determined period and under the terms provided by the leasehold grant. Only upon completion of the development does the land grant become definitive. It is therefore essential to perform the necessary searches with the Property Registry to ascertain if the land has been developed at the right time, otherwise it may be reverted to the Macau Government. This would considerably affect the value of the target business and could compromise the whole success of the operation.  Furthermore, as the leasehold is granted for an initial term of no more than 25 years and is successively renewable for terms of 10 years, it is also important to verify whether the grant has expired or to ascertain if its renewal was requested in time.

Through property searches it is also possible to determine which interests are registered over properties, such as ownership title, promissory sale and purchase agreements, right of usage, mortgages and encumbrances that may hinder the disposal of properties. Certain pending court proceedings on properties are also subject to registration. For undeveloped land or properties under construction the due diligence is more difficult. The property registration record does not give a clear perspective on the effective status of construction works, which requires further investigation on the construction project with the Public Works Department. Moreover, it may be important to confirm if inspection of the works has been completed, so as to verify whether the land has been properly developed or if there is a potential infringement of construction and zoning rules.

Employment

Employment is one of the most decisive factors for the success of a merger or acquisition in Macau. According to the Macau Census and Statistics Department, the unemployment rate in Macau is only 1.7% (as of from December 2013 to February 2014), meaning the number of residents seeking employment is very low.

The virtual full employment situation, in conjunction with a notorious shortage of qualified human resources, makes the success and feasibility of businesses in Macau dependent on their capacity to hire non-resident employees. In this regard, the main challenge is that the Macau Government has implemented strict policies on non-resident labour. An employer intending to hire non-local staff must apply to the Human Resources Office (HRO) for a work permit, which only authorises a limited number of non-residents and requires a ratio between local and non-local employees (which for SMEs is currently at least twice as many locals). In addition, the permits are temporary (maximum two years) and their validity and renewal are subject to the compliance of certain obligations. Consequently, if the target company has non-resident staff, it is essential to conduct a thorough and detailed review of the HRO authorisations and the employment documents, in order to determine if the work permits are valid and if the relevant legal provisions are being observed in order to avoid potential sanctions or even criminal liabilities, given the stringent laws on non-resident labour and illegal work. Infringement of these laws would also compromise the target’s ability to hire and employ non-resident workers in the future, as well as imply the cancellation of the existing work permits.

It is also crucial to review all employment conditions and contracts for compliance with the local labour laws to avoid sanctions imposed by the Labour Department and potential liti­gation with employees. The Macau employment system is mostly based on a set of mandatory rules that cannot be derogated by the employment agreements. Such rules mainly concern overtime work, night work and shift work; weekly rest days; annual leave, sick leave and other statutory leaves; as well as employment termination. This is particularly important if the selected acquisition method is a “transfer of undertaking”, whereby all employees, including all rights and obligations arising from their employment agreements, will be transferred to the purchaser. If the employment agree­ments do not comply with the relevant laws (as is often the case), the purchaser may be sanctioned by the Macau authorities or may become liable to pay compen­sations to the employees.

Litigation

The pending court proceedings to which the target business is a party should be identified through court searches (the courts will issue the relevant certificates upon simple written request) and covered by representations and warranties of the seller, in order to protect the position of the purchaser. However, some cases (e.g. if the employee claims filed with the Labour Department) can only be accessed by the direct parties and not by the potential investor. This should also be considered when defining the necessary representations from the seller.

Regulations and Licensing

Certain activities and businesses in Macau are subject to licensing and supervision of certain governmental departments, such as financial or banking, gaming, advertising, hospitality industry, security and pharmaceuticals. All other areas are unregulated and do not require specific licenses. As part of the due diligence exercise, a review of the relevant licenses and compliance with regulatory requirements is also important, as existing licenses may not be renewed or cancelled in case of infringements, which ultimately compromise the effective operation of the business.

Don’t Be Intimidated

Macau maintains its attractions as a place to do business and will continue to do so. In spite of some difficulties and hurdles an investor may encounter when acquiring a business, with good guidance and advice and a thorough due diligence process, any adversity can easily be overcome and lead to a smooth and success­ful completion of the transaction.