Goodwin Insights May 07, 2020
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Chinese Cross Border Life Sciences Strategic Transactions in the Age of COVID-19

新型冠状病毒(COVID-19)特殊时期下战略聚焦中国生命科学领域的跨境交易

Increasingly in China over the past decade, corporations in the pharmaceutical, biotechnology and medical device sectors have supplemented their own internal research and development and business development efforts by participating in the equity funding of start-up and early stage Chinese as well as other Asian, U.S. and European companies which have over time been able to provide the corporation’s business with potential strategic and sometimes even financial gain.  In recent years, regulations in both China and abroad relating to currency controls, foreign investments into sensitive industries and other factors have complicated this strategy, but it has continued to be an important means by which innovation in the sector is advanced in China and more broadly throughout Asia and the world.

With the onset of the COVID-19 pandemic, there is an increasing urgency to finding solutions to the crisis, including through vaccine development and manufacturing innovations, medical device advancements, and technologies to better protect the populations such as diagnostic testing tools and tracing applications and software systems. Chinese and other companies in the sector are seeking innovative means to address the enormous challenges the world is facing. As a result, many have increased budgets to fund both investments into and partnerships with third parties developing or refocusing existing innovative programs to help bring an end to the pandemic. 

In order to effectively and efficiently deliver practical legal and business advice to the investment professionals within a corporate strategic investor now faced with overseeing these critical efforts, in-house counsel of larger Chinese domestic and multinational life sciences companies advising on these matters must be sure to consider a variety of important issues unique to these types of complex transactions.

In contrast to the limited involvement an in-house lawyer may have when working with a traditional investor involved in what generally is a one-off purely finance-driven venture capital investment decision, in-house counsel and their investment professional colleagues within corporate strategic investors often must provide ongoing legal and business guidance and support throughout the life cycle of a strategic portfolio company. In-house counsel advising a strategic investor must be prepared to provide legal services at all stages of the relationship, from assisting in the seed funding of small start-ups to advising on strategic collaborations or partnerships, to overseeing exit strategies as portfolio companies are acquired or undertake initial public offerings.

In addition, strategic portfolio companies often require advising on expansion capital rounds and structuring complex business arrangements and milestone-dependent future equity or debt infusions that may accompany strategic relationships, often with affiliates of the strategic investor itself. First-hand knowledge of today’s challenging life sciences business and legal market is crucial at each of these steps, as can be working relationships with traditional venture capital firms and third-party financing sources worldwide, such as venture lenders and royalty monetization funds, focused on the industry who also may be involved in these transactions.

The strategic nature of many corporate equity investments often also require increased scrutiny and analysis by in-house lawyers of ancillary legal issues that can accompany the strategic relationship, including intellectual property review, tax structuring, review of licensing arrangements, structuring employment and equity compensation matters, navigating complex FDA or EMA or multi-jurisdictional reimbursement-related regulatory environments, overseeing and understanding potential litigation, and sometimes even structuring around or advising on bankruptcy-related issues when a portfolio company finds itself in distress.

In addition, Chinese corporate investors placing money outside of the country into non-domestic investments must consider complex domestic currency control regulations, and rules in the jurisdictions of their target portfolio companies, such as the Committee on Foreign Investment in the United States (CFIUS) review process that can sometimes surface as an issue when investing into areas considered sensitive, such as convergence transactions involving life sciences and technology blended businesses; or involving complex artificial intelligence, or companion diagnostic software that may gather private information on patients in violation of European Union’s General Data Protection Regulation (GDPR) rules.

Corporate equity investors face a number of investment considerations unique from those of more traditional financial investors, such as venture capital or private equity firms. For example, the decision of whether or not a corporate investor should have a board seat on a private company it has invested in but may also have a strategic interest in is a question that needs to be carefully considered. In such cases, in-house lawyers may be asked to help implement internal structures that will shield their investment professional colleagues who could be assuming certain fiduciary roles at their portfolio companies, from their separate business colleagues who may potentially be engaging in ancillary activities as part of the corporation’s overall strategy that are competitive to the portfolio company. In-house lawyers working on these types of transactions must also be aware of the ability for their investment professional colleagues to opt for a non-voting board observer seat type role and to consider how such a position might impact the corporate strategic investor’s ability to monitor its portfolio company relationship, from each of a financial and strategic perspective. In addition, information received from portfolio companies, while useful in analyzing the value of the investment, can also result in unforeseen consequences on the strategic investor, including non-competition, securities law restrictions and CFIUS considerations.

Similarly, large corporate investors must structure their investments to be sure that certain standard provisions in investment documents are properly tailored to protect the corporation from reputational and financial liability. For example, it is critical to focus carefully on publicity and confidentiality provisions, to insure that a portfolio company does not use the corporate investor’s involvement to improperly promote its business or financing prospects in a manner that might lead to a shareholder suit or similar litigation if the business does not perform as promised. While the corporate investor is unlikely to be directly drawn into any such litigation, it presumably will not want its own reputation tarnished through its affiliation with a portfolio company.

In addition, it is critical to carefully review technical investment provisions, such as so-called “drag-along” provisions to make clear that the strategic investor will not have to represent to any subsequent buyer of the business anything about the business’ operations, or have an indemnity obligation that is uncapped or joint and several with other stockholders who may not have the same financial means as the strategic investor.

For corporate strategic investors, it often will be necessary for in-house counsel to implement unique investment provisions. Consider, for example, covenants that might need to be added to permit the strategic investor which is itself a corporation, unlike the partnership form generally used by more traditional investment funds, from having to consolidate its financial statements from an accounting perspective with those of its new portfolio company.

In-house counsel to corporate strategic investors often are asked to assist in preparing and putting in place investment approval processes, forms of confidentiality agreements that do not “taint” investment professionals or other business personnel who may be working within the investor’s greater business in areas competitive to a possible portfolio company, forms of equity investment and bridge loan documents, and guidelines for how to handle a distressed portfolio company that may be facing bankruptcy or litigation. These and other issues mentioned above take on additional importance as portfolio companies themselves grow and go public.  Working to standardize these processes and agreements facilitates and simplifies additional investments and the monitoring of existing portfolio companies.

Equity investments by Chinese and other corporate investors are increasing in the life sciences sector as companies in China look outside of their own organizations domestically, in Asia more broadly, Europe and the U.S. for innovative technologies and approaches to address the COVID-19 pandemic.  The increased investment activity means in-house lawyers and their business counterparts are increasingly needing to consider the unique issues for both the corporation and its portfolio companies that such investments raise.  In-house lawyers working, and advising their business counterparts, on these unique types of transactions must be well prepared to navigate and address such issues in order to achieve the legal and strategic objectives of their company’s business.

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Kristopher Brown, Wendy Pan and Yash Rana are partners in the Life Sciences and Technology Practice Groups of global law firm Goodwin Procter LLP, where they focus on venture capital, private equity, initial public offerings, M&A and complex licensing, collaboration and joint venture transactions, often involving the pharmaceutical, biotechnology and medical device industries.

在过去十年中,越来越多的中国制药、生物技术和医疗器械领域公司通过参与对中国、其他亚洲地区、美国以及欧洲的早期初创公司进行股权融资,补充自身研发和业务发展力度,从而逐渐给企业经营提供潜在战略及财务回报。近年来,中国和海外有关外汇管制、对敏感行业的外商投资和其他因素,使这一战略变得复杂,但它仍是中国乃至整个亚洲和世界推到该领域创新的一个重要引擎。

随着COVID-19大流行的爆发,寻找应对此次危机解决方案的紧迫性日益增加,包括通过疫苗开发和制造创新、强化医疗器械、以及有助于更好地保护人群的创新技术,如诊断测试工具、追踪应用和软件系统。中国和该领域的其他公司正在力求加快为这些亟待解决的全球性挑战寻找创新的解决方案。因此,为遏制这一流行病,许多国家增加了预算,以资助对第三方的投资和与第三方的合作,发展或重新调整现有的创新项目。

为了有效和高效地向公司型战略投资者中正在面对监督这些重要工作的专业投资人员提供实用的法律和商业意见,中国国内和跨国生命科学公司的内部法律顾问需考虑此类复杂交易中的各种重要问题。

在传统投资者通常进行的一次性财务风险资本投资项目中,内部法律顾问的参与程度往往有限。与之不同的是,公司型战略投资者的内部法律顾问及专业投资人员往往需要向被投公司提供持续的法律及业务指导和支持,贯穿整个投资的始终。向战略投资者提供意见的内部法律顾问必须有所准备,在投资项目的所有阶段提供法律服务,包括从协助向小型初创企业注入种子资金,到为战略合作或合伙提供法律咨询,再到监督被投公司被收购或上市时的退出策略。

此外,被投公司往往还需要有关扩展资本投资、复杂业务架构、与里程碑相关的未来股权或债权融资的意见,这些事件与战略投资关系相伴,通常涉及战略投资者的关联方。针对上述每个步骤,当今充满挑战的生命科学业务及法律市场相关的第一手知识至关重要,与专注于此类行业、并可能参与这些项目的传统投资基金和第三方融资渠道 (如创业融资贷款人和版税货币基金) 的工作关系也至关重要。

基于公司型股权投资项目的战略性质,内部法律顾问需要对被投公司的相关法律问题进行严格审查和分析,包括知识产权审阅、税务结构、许可交易安排的审阅、雇佣及股权激励架构、复杂的美国食品药品监督管理局或欧洲药品管理局指引以及跨司法管辖区的有关报销规管架构、监督和了解潜在诉讼,有时甚至需要就被投公司的破产相关问题进行构架或提供意见。

此外,将资金用于境外企业投资项目的中国公司型投资者必须考虑复杂的外汇管制规则、以及目标被投公司所在司法管辖区域的法规,例如美国外国投资委员会(即CFIUS)的审查流程有时可能会在投资敏感领域时成为问题,比如涉及生命科学和技术混合业务的复合交易、涉及复杂人工智能的复合交易、或可能违反欧盟《一般数据保护条例》(即GDPR)的收集患者私人信息的配套诊断软件。

公司型股权投资者面临着诸多不同于传统财务投资者(如风险投资或私募股权公司)的投资考虑。例如,公司型投资者应当仔细考虑是否应该在其已投资的、可能同时拥有战略利益的私人公司中拥有董事会席位。在这种情形下,内部法律顾问可能会被要求帮助设置内部组织架构,以使其可能会在被投公司中承担某些受托职责的专业投资人员同事,独立于那些可能参与投资方公司整体战略下与被投公司业务构成竞争的辅助活动的业务线同事。处理这类交易的内部法律顾问还必须了解其专业投资人员同事可选择无表决权董事会观察员席位的能力,并从财务和战略角度上考虑这一位置会对投资方公司监控其与被投公司关系的能力产生何种影响。此外,从被投公司获得的信息虽然有助于分析投资价值,但也可能给战略投资者带来无法预见的后果,包括非竞争限制、证券法限制和CFIUS问题。

同样,大型的公司型投资者也必须进行投资结构设计,以确保投资文件中的一些标准条款已妥善修改,能够保护公司免于声誉损害和财产责任。 例如,很重要的一点是审慎关注公布和保密条款,以确保被投公司不会利用公司型投资者参与一事以不恰当的方式宣传其业务或融资前景,从而导致在业务表现不如预期的情况下,引发潜在的股东诉讼或类似诉讼。虽然公司型投资者不太可能被直接牵扯进此类诉讼中,但想必其也不希望因为与被投公司的关联关系而导致自身声誉受损。

此外,仔细审阅技术投资条款至关重要。例如在“领售权”条款中明确表明战略投资者无需向任何后续公司收购者作出任何有关业务运营的陈述,也无需承担无上限的赔偿义务,或无需与其他不具备战略投资者同等财务资源的股东承担连带赔偿责任。

对于公司型战略投资者,内部法律顾问通常需要设置特别的投资条款。例如,考虑增加承诺条款,以使本来就是一家公司的公司型战略投资者(此形式不同于传统投资基金通常使用的合伙形式),无需从会计角度与其新被投公司合并财务报表。

公司型战略投资者的内部法律顾问经常被要求协助准备和落实投资审批流程、保密协议模板(该模板不应影响专业投资人员或其他业务人员在投资者的更大业务、但可能与被投公司构成竞争的范畴内工作)、股权投资和过桥贷款文件模板、以及关于如何处理可能面临破产或诉讼困境的被投公司的指引。 随着被投公司的成长和上市,这些问题和上述其他问题将更为重要。标准化这些流程和协议会便利并简化新增投资活动以及对现有被投公司的监督。

随着中国企业在国内、其他亚洲地区、欧洲和美国寻求创新技术和方法来应对COVID-19大流行时,中国和其他公司型投资者在生命科学领域进行的股权投资也逐渐增加。投资活动的增加意味着内部法律顾问和他们的业务伙伴越来越需要考虑技资方公司及其被投公司所面临的各种挑战。内部法律顾问必须做好充分的准备,针对此类复杂交易中的各种重要问题开展工作并向其业务伙伴提供建议,从而帮助公司实现其法律和商业目标。

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宗科睿潘文森荣雅士是高赢国际律师事务所生命科学与科技业务组的合伙人。他们专注于风险投资、私募股权、首次公开发行、并购以及复杂的许可、合作与合资交易,多涉及制药、生物技术和医疗器械行业。