Cash-rich Chinese companies are purchasing billions of dollars worth of assets in the developed economies of North America, Europe and Australia. How can law firms and in-house counsel successfully handle the rush of outbound investment projects?
By George W Russell
From the compradors of early trade relations to the fixers of today, international companies have long sought guides to light their path through the mysterious economic and cultural labyrinth that is perceived as China. Nowadays, amid rapid growth by Chinese state-owned enterprises (SOEs) and private companies, and low asset prices in the developed world, the shoe is on the other foot.
As Chinese businesses dip their toes in the waters of faraway oceans, seeking overseas acquisitions to build economies of scale, acquire technology or launch into new markets, they are finding they need help with foreign law. In response, both international and Chinese law firms are ramping up their ability to handle outbound Chinese investment.
Official Chinese statistics put the total value of outbound investment deals by non-financial Chinese companies last year at about US$42.1 billion. Such deals are picking up pace: the value rose 50% in the second half of 2009 compared to the previous half-year, according to global business consultancy PricewaterhouseCoopers (PwC).
“Outbound investments are expected to rise, motivated by Chinese clients’ desire to integrate their supply chain and expand into large foreign markets, and the related ambition to acquire internationally recognized brands with advanced technologies to help them compete more effectively at home,” says Zhang Danian, managing partner in the Shanghai office of Baker & McKenzie.
While the bulk of Chinese expansion may be in Asia, there is a sense that the current economic conditions could presage a boom in M&A by Chinese companies in the developed world. “Chinese private and state-owned companies are acting more aggressively when it comes to acquiring Western companies,” says John Flanigan, a partner at Salans who heads the firm’s China desk in Paris. “In that light, we have experienced an increased demand from Chinese investors for overseas acquisition or cooperation targets and related legal advice.”
MOFCOM approval speeds up
Chinese investors have been encouraged to look abroad by recent changes in the rules for outbound investment. New Ministry of Commerce (MOFCOM) rules designed to streamline the approval process came into force in May 2009. Analysts say about 85% of deal proposals are now, on paper, subject only to a three-working-day non-substantive review by a provincial level branch of the ministry.
Previously, most proposals required approval from the ministry’s headquarters in Beijing. Under the new system, further reviews are mandatory only for investment (1) in Taiwan, war-torn Afghanistan or Iraq or one of the 23 countries that does not have diplomatic relations with China; (2) that involves the Chinese party investing US$100 million or more; (3) that involves investment by a central-government-controlled state-owned company; (4) that covers more than one territory; or (5) that includes the establishment of a special purpose vehicle.
On paper, according to recent analysis by the law firm Paul Hastings Janofsky & Walker, the 2009 rules have shifted the burden of proof of the legitimacy (or otherwise) of applications from the applicant to the government. In reality, the firm adds, the central office of MOFCOM – as well as other authorities such as the State Council – retains ultimate discretion in approving or rejecting outbound investment proposals.
Faced with flattening domestic demand in some sectors and cheaper developed-nation asset prices, many Chinese companies are embracing cross-border mergers and acquisitions for the first time. That has put pressure on Chinese companies to confront what Chris Lowe – a Singapore partner with Watson, Farley & Williams – has described as one of the key challenges for an international law firm working with China clients on overseas projects: the “learning curve for China clients on cross-border deals.”
Law firms, meanwhile, have been devoting more resources to actual and potential outbound investment by Chinese clients. “Roughly half of our China M&A and investment practice is devoted to outbound transactions,” says Lawrence Sussman, managing partner of the O’Melveny & Myers office in Beijing. “There is definitely a higher share than two or three years ago.We are increasingly asked to advise SOEs in connection with outbound M&A, Chinese private equity (PE) sponsors in connection with offshore fund-raising and Chinese sovereign wealth fundsin connection with large-scale outbound M&A and limited partner investments in offshore PE funds.”
But international law firms caution that Chinese companies are often trying to expand in Europe and North America without full knowledge of the regulatory pitfalls and, in some cases, amid a climate of suspicion. “As China’s economic strength increases, there is both increased interest in its market potential and fear that it will dominate and overwhelm domestic markets,” says Alice Young, chair of the Asia-Pacific practice at Kaye Scholer in New York.
Chinese clients who are unaccustomed to international exposure, say lawyers, can also trip up on technical issues. “They are often unfamiliar with issues faced by bidders for international assets, including auction timetables, risk allocation in transaction agreements, securities law requirements and the retention of target employees,” says Paul Strecker, an M&A partner with Shearman & Sterling in Hong Kong.
Who’s the guide?
For Chinese companies, there is also the basic question of which type of firm to choose: local or international. “When Chinese companies look to solve their business challenges outside China, they look for the firms that can help them channel through the unfamiliar legal and business hurdles and in the meantime can work with them to understand their strategies,” says Henry Liu, a New York partner who chairs Nixon Peabody’s China practice.
Clients say that both international firms and local firms in target countries bring their own specific skill sets to any complex transaction. “Local law firms play a significant role in helping us assess the various risks in making an investment or acquisition,” says Thomas Yih, general counsel with Shanda Interactive Games, a Shanghai-based videogame developer that recently bought majority stakes in Korean Stock Exchange-listed game publisher Actoz Soft and Nasdaq-listed ringtone provider Hurray!.
But companies like Shanda with international ambitions say they also need sound cross-border deal advice, and for that they turn to foreign firms. “Given that we are publicly listed, international law firms play a critical role in assessing the impact of various transactions,” says Yih. “International firms are often able to leverage their worldwide offices to with the transaction and, to, for example, understand market terms.”
Chinese business goes global
Outbound investment by Chinese companies is not merely a business plan; it’s a matter of public policy. More than a decade after Beijing launched its Go Out (now often referred to as Go Global) strategy to encourage Chinese businesses to invest overseas, it has taken a global recession for its policies to be implemented with any gusto.
Since the beginning of the credit crunch, Chinese officials have been urging companies to buy internationally. Outbound investment uses “overseas resources, markets and advanced technologies to help facilitate the
development of China’s domestic economy”, Zhang Xiaoqiang, a vice-chairman of the National Development and Reform Commission, said in a December 2009 speech.
“Chinese companies are discovering that, compared to their Western counterparts, they have significant resources of cash as well as a good number of intelligent and capable people to manage them, which puts them in an advantageous position,” says Vittorio Noseda, managing partner of Studio Legale NTCM in Milan.
Chinese companies have boosted the sluggish worldwide mergers and acquisitions and initial public offering markets in both North America and Europe. O’Melveny & Myers represented Credit Suisse Securities, UBS and BofA Merrill Lynch in the US$248.4 million global IPO of China Real Estate Information Corporation. “We have seen a recent upsurge in activities coming from China in the forms of M&A, direct investment, co-investment, financing, and intellectual property transactions,” says Lawrence Sussman, managing partner in the Beijing office of O’Melveny & Myers.
Last year also saw the first IPO of a Chinese company on the Frankfurt Stock Exchange. CMS Hasche Sigle advised Vtion Wireless Technology, a manufacturer of wireless chip cards, in its €55.6 million (US$76 million) debut. “After the recovery of the worldwide economy and most capital markets segments, we see more Chinese IPOs in Germany likely to come,” says Volker Potthoff, a Frankfurt partner.
However, Chinese investments in developed nations have been among the most strategic as well as the most closely scrutinized. Last year’s largest acquisition by a Chinese company was the US$8.9 billion offer by China Petroleum & Chemical Corporation (Sinopec) for Addax Petroleum, one of several major Chinese investments in Canada. In addition, PetroChina bought 60% of Calgary-based Athabasca Oil Sands Corporation for C$1.9 billion (US$1.8 billion).
“Since Canada is not only rich in natural resources, but also home to many natural resources companies with assets around the globe, it has been receiving a great deal of attention from Chinese enterprises,” says Robert Kwauk, a Beijing-based lawyer who heads the China practice at Toronto-headquartered Blake Cassels & Graydon.
Gowling Lafleur Henderson, which advised the Chinese government on Canada’s mining regulations, has been a preferred Canadian counsel for the China Council for the Promotion of International Trade (CCPIT) since 2008.
Canadian law firms have been particularly keen to foster high-level relationships. A top firm, Ogilvy Renault, has arranged visits to China involving high-profile partners such as former prime minister Brian Mulroney. “We are very focused on developing our China practice,” says Norman Steinberg, the firm’s Montreal-based chairman.
Another former prime minister, Jean Chrétien, is a member of the law firm Heenan Blaikie. “He enjoys a number of warm business relationships in China,” says Jeffery A Barnes, a Toronto partner. Other Canadian firms such as McCarthy Tétrault and Torys have also been involved in key China deals.
Lang Michener, meanwhile, has been assisting Chinese companies to list on Canadian stock exchanges. “We have been involved in a significant number of Canadian listings by China-based companies,” says Stephen Wortley, a Vancouver partner and chair of the firm’s China practice group.
Major transactions have occurred in other commodity-rich developed economies such as Australia, reflecting China’s hunger for access to natural resources. They include Yanzhou Coal Mining’s A$3.5 billion (US$3.2 billion) acquisition of Felix Resources and Sinochem’s A$2.84 billion bid for an Australian company, Nufarm. Corrs Chambers Westgarth, a major Melbourne firm, advised Yanzhou on the Felix deal as well as Baosteel Group Corporation’s A$285.6 million investment in ASX-listed Aquila Resources.
Deacons, now merged with Norton Rose, advised on the first takeover of an Australian company by a Chinese state-owned enterprise. “China outbound business is one of four main workstreams in our Beijing office,” says Norton Rose partner and China practice head Peter Burrows. “The Chinese clients represented by Deacons and by the existing Norton Rose Group have some overlap, but the enlarged firm will have much more opportunity.”
With relatively low asset prices and a vast domestic market, a foothold in the United States remains the main prize for many Chinese companies. In one of the larger deals of 2009, CIC took a US$1.58 billion stake in energy utility AES Corporation. Smaller deals include the purchase of General Motors’ Hummer brand by Chengdu-based Sichuan Tengzhong Heavy Industrial Machinery for US$150 million.
The Chinese market is very different from other major markets in terms of how local companies seek foreign legal representation. “Chinese companies rely heavily on referrals from other service providers and professionals such as investment bankers and consultants,” says John Yung, a partner in Sacramento, California, with the Seattle-based firm Bullivant Houser Bailey. “We will continue to actively market to Chinese companies through maintaining and expanding such relationships.”
International firms believe they are the obvious candidates to guide Chinese clients making their first pass through the maze of North American and European regulatory issues. “Part of the role of international counsel is to assist the client in effectively managing these issues in a way that allows the client to remain competitive,” Strecker adds.
Local firms reach out
Local Chinese firms counter that they are broadening their horizons. Major Beijing-based firms such as King & Wood have opened overseas offices while others, such as Grandall Legal Group, have entered into referral pacts with foreign firms. JunZeJun, a Beijing firm, has a relationship with Kahn & Associés, a French firm.
Another Beijing firm, TransAsia Lawyers, has forged strategic alliances with Freehills in Australia and Torys in Canada to help it access those two key destinations. “I am informed by our SOE clients that they are attracted by our reputation as a local law firm with an international flair,” says TransAsia partner Jesse Chang in Beijing.
However, Chinese law firms often don’t have the depth of international experience for complex cross-border M&A transactions, their foreign counterparts say. “If the acquisition target is an overseas entity, it’s quite clear that Chinese counsel are not able to advise,” says Wendy Yan, a partner in Shanghai with Minneapolis-based Faegre & Benson.
Yan adds that the choice between whether to hire a Chinese or international law firm can hinge on the client’s mindset. “It depends on the culture of the client,” she says. “If it’s a mature company, they’re inclined to use international counsel. On the other hand, a new participant might want to rely on Chinese counsel.”
Despite their differences, the two groups go out of their way not to antagonize each other. “We tend to be closer to Chinese firms than other firms, as we have not and will not hire Chinese lawyers to compete with Chinese firms,” says Juan Martín Perrotto, managing partner in the Beijing office of Madrid-based Uría Menéndez. “Instead, we work with them and supplement their international capabilities by adding our expertise and cross-border resources.”
Some lawyers say a combination of local and international lawyers can help bridge the communication gap. Yung recalls a recent litigation in the US against a Chinese client. “During our conference call with our client, our Chinese alliance law firm also attended a board meeting not only to provide translation assistance but also to explain US legal concepts,” he says. “These relationships allow us to more efficiently and effectively represent our Chinese companies.”
Smaller markets loom large
With law firms from smaller markets, outbound Chinese investment already accounts for a majority of transactions. “I would say 85% of our China practice involves advising Chinese entities on investment into North America,” says Joyce Lee, a Vancouver partner and chair of the China Group at Canadian firm McCarthy Tétrault.
Torys’ China practice is primarily directed at advising Chinese entities on investments and acquisitions involving Canadian companies. The firm acted for CIC on its C$1.7 billion investment in Canada’s Teck Resources. “Our focus on transactions outbound from China has coincided with the increasing trend of Chinese overseas investment, which has accelerated over the past five years,” says Michael Amm, a partner in Toronto.
Ik Wei Chong, a Shanghai partner with English firm Clyde & Co, estimates that at least half of the firm’s China practice involves advising Chinese companies and clients in their transactions and disputes overseas. “This percentage has certainly increased over the past 18 months as Chinese companies remain relatively cash-rich and are hungry for acquisitions in strategic sectors overseas,” he says.
At least one English firm has made outbound investment its only forte in China business. “Our sole focus is on advising Chinese companies on setting up business in the UK, France and Germany and assisting those companies that have set up here,” says Richard Bursby, a corporate partner and chair of the China group at Taylor Wessing in London. “The percentage can’t increase but the volume has as Chinese companies increasingly look outward.”
The China practices at several European firms also report a majority of outbound deals. Jonas Rogberg, an associate at Delphi in Stockholm, says Chinese clients account for 80% of the firm’s China practice. Carl-Fredrik Hedenström, a Stockholm partner with Copenhagen-based Magnusson puts the figure for his firm at 90%. Karen Grauers, a Shanghai partner at Vinge, another Swedish firm, says Vinge signed several new Chinese clients in 2009.
Meanwhile, two-thirds of clients at Italian firm NCTM’s China practice are Chinese companies, according to co-managing partner Vittorio Noseda in Milan. Madrid-based Garrigues says inbound China work still outpaces outbound but the latter is rising. “It has increased recently, especially since the end of 2008,” says Francisco Soler Caballero, a partner at Garrigues in Shanghai.
Australian firms are also getting in on the act. Russell Beer, a Cairns-based partner with MacDonnells Law, says the firm is gearing up for an influx of Chinese investors seeking mining and agriculture assets.
Several small and medium-sized legal offices in the US are now actively courting Chinese clients. Husch Blackwell Sanders has represented Chinese clients wanting to invest in America only since 2009. “We have more aggressively sought after Chinese companiesfor deals in the US by travelling to China and personal visits with contacts or making proposals for opportunities that we learned through connections,” says associate Fang Shen in Kansas City.
Such firms are seeking to link Chinese investors with bargain-basement M&A opportunities in areas of the US that have been in a prolonged recession, such as the Midwest. “It seems that now is a good time to get a slice of the American pie and get it cheap too,” says Edyta Zydorek, founder of Zydorek Law Office, a firm in Independence, Ohio, near Cleveland. (Another Cleveland-based firm, Baker Hostetler, expects to open a Beijing office in 2010.)
“We are in the midst of developing a Chinese marketing plan,” says John Tang, a partner with Brennan Manna & Diamond in Akron, Ohio, another affected “rust belt” city. “We realize that there are a lot of Chinese companies looking to invest in the US and elsewhere and we hope to attract some of those companies to Ohio, where there is a great potential.”
Dykema Gossett, a firm based in Detroit, one of the most industrially ravaged parts of North America, is hoping to leverage its ancestry into China-related expertise. “The firm traces its roots to Detroit and the automotive industry, which is also a pillar industry for China,” says partner Richard Goetz. “Although US auto manufacturers and suppliers have experienced some difficulties in recent years, Detroit and south-eastern Michigan grew as a key research and development and design centre for the global industry.”
Shougang buys Delphi Corporation
One example of corporate China’s ambitions to expand in the US manufacturing sector is the acquisition in 2009 by state-owned steel company Capital Iron & Steel (known as Shougang) of Delphi Corporation, a Troy, Michigan-based maker of suspension and brakes components that was formerly a parts subsidiary of General Motors Corporation (GM). Beijing partners Xiao Yong and Paul Deemer led the Vinson & Elkins team advising Shougang, which paid US$90 million for Delphi.
According to the lawyers, the deal is an example of attempts by Chinese companies to grow expertise by seeking international assets further up the value chain. “They were more focused on acquiring mining and steel assets in Peru, Australia and Mongolia,” Yong recalls. “They had a lot of spare cash and the Beijing city government – their major shareholder – was pressuring them to get into spare parts.”
Delphi was an obvious target. It was ailing and had been under bankruptcy protection since 2005. GM had spent a lot of effort scouting out potential buyers. Nevertheless, Yong and Deemer saw three obvious obstacles. “Firstly, we needed US bankruptcy law specialists.” Fortunately, Vinson & Elkins’s Beijing office boasted two associates who had moved to Beijing in 2007 and who were knowledgeable about US bankruptcy law.
“Secondly,” Yong adds, “some of the Delphi assets were located in the US, including technology, which was a little bit sensitive. We needed approval from the US government, from the inter-agency Committee on Foreign Investment in the United States, from the Treasury, and from the Commerce and Defense departments.”
These issues proved to be complicated but not insurmountable. There was, however, a cultural hiccup when it came to obtaining US financial regulators’ approval. “In the US,” says Yong, “there is a need to explain the ultimate shareholding. Who controls Capital Iron and Steel?” When told it was the Beijing city government, he adds, officials wanted to know who in the Beijing city government is responsible for state-owned companies.
Investment outside China: the basics
Lawyers have offered the following 10 points to any PRC company thinking of investing in Europe, North America or Australia.
Complete the necessary procedures in China before you leave home, such as gaining MOFCOM approval. Ensure you have sufficient access to foreign exchange.
Understand the political context of the deal in the target country. Transactions that are legally sound can be derailed by political or shareholder opposition abroad. Many places are unaccustomed to Chinese investment – particularly by state-owned entities – and this can necessitate thorough and careful public relations work.
Be aware of the particular characteristics of the intended deal, such as auction timetables, issues of risk allocation in transaction agreements and securities law requirements.
Carefully judge the need for legal and other professional advice, and who may best provide it.
Do not assume that all “Western” destinations are the same. The sense of time and urgency, negotiating styles and use of language may be very different in Australia, France, Spain, Sweden, the UK and the USA.
In negotiations, spend time so that each side understands the other’s assumptions, goals and expectations.
Be patient – deals can sometimes proceed more slowly, and encounter more bureaucracy, in developed economies than in China.
Be as transparent as possible – lack of transparency can cause discomfort among business people and officials in the target country.
Understand the legal requirements that apply to the operations of the target company, which will continue to apply after the acquisition. Each country has its own regulations governing, for example, competition, employment and health and safety.
Devise and implement a strategy for the retention of key employees in the target company.
The lawyers answered that Shougang, although technically under the city’s control, is administered by its own chairman and board of directors. “Who can fire the board?” the American regulators asked. “The Beijing State Assets Management Bureau,” the lawyers replied. “Who controls the bureau?” The ultimate authority, they explained, was Guo Jinlong, mayor of Beijing.
“So the US says we need the mayor’s personal information,” Yong continues. “Well that would cause a lot of trouble. In that case, an acquisition by a central-government-owned enterprise would mean that all the personal information about President Hu Jintao would have to be provided. Giving information about state officials to the US government would be very questionable.”
In the Delphi case, a compromise was eventually reached between Chinese and US officials and the deal went through. But in recent years, a number of attempts by Chinese state-owned entities to make substantial acquisitions in the US have faltered. “Chinese companies are very reluctant to buy in the US,” says Yong. “It’s too much trouble.”
The US$1.8 billion sale of Ford Motor Company’s Volvo car unit to Hangzhou-based Zhejiang Geely Automotive illustrates the difficulties that developed-world governments and private industry have in dealing with Chinese suitors. The deal, expected to be finalized by June 2010, will contain a caveat to protect Ford’s intellectual property (IP) rights covering safety and environmental technology.
Deals involving Chinese entities – especially in sensitive sectors – often receive much more scrutiny than those from other nations. “There have been unfortunate episodes with the Foreign Investment and National Security Act that have given some Chinese the understandable impression that the United States is hostile to Chinese investment,” says Elliot Feldman, a partner at Baker & Hostetler in Washington.
“There are always cultural and language issues and we are particularly sensitive to them,” Feldman acknowledges.“However, there is a greater challenge with China because of antipathy in [the US] Congress. There are congressmen routinely proposing anti-China legislation, whether expressly in allegations of currency manipulation or in modest disguise such as climate legislation.”
When China’s outbound investment strategy first kicked off in 1999, most deals were too small or insignificant to worry most foreign regulators. That changed in 2005, as giant, cash-rich Chinese companies sought mergers and acquisitions with large foreign counterparts. In August that year, political opposition in the US torpedoed China National Offshore Oil Corporation’s US$18.5 billion takeover bid for Los Angeles-based energy company Unocal.
Today, political opposition remains a major obstacle to Chinese outbound investment. In December 2009, the Committee on Foreign Investment in the United States cited national security issues to force China’s Northwest Nonferrous International Investment Company to withdraw its planned investment in Firstgold, a Nevada mining company. Patrick Wong, a partner with Mayer Brown JSM in Hong Kong, describes the decision as a setback, “but I believe that PRC enterprises will continue to look for suitable acquisition targets,” he adds.
Hostile reactions elsewhere, too
In June 2009, Anglo-Australian mining giant Rio Tinto rejected a proposed US$19.5 billion investment by Aluminium Corporation of China (Chinalco) after the deal attracted opposition from Australian shareholders, politicians and the public concerned by state-owned Chinalco’s access to massive amounts of Australian natural resources.
The decision followed the Australian government’s blocking of part of a A$2.6 billion (US$2.3 billion) friendly takeover offer for Oz Minerals in February 2009 that also cited sensitive security issues. “Most Chinese investments in Australia are subject to governmental scrutiny as the majority of [them] are made through state-owned enterprises, which are viewed by the Australian government to be agents of the Chinese state,” says Sam Farrands, a partner at Australian firm Minter Ellison in Hong Kong.
Farrands estimates that over 50% of the time lawyers spend working on a Chinese acquisition in Australia is typically spent on regulatory issues. Others put the figure even higher. “I would say it makes up 70% of our work,” says Matthew Murphy, the Beijing-based managing partner of MMLC Group, another Australian firm. “Many Chinese clients are happy to do contract drafting and negotiation on their own, but they need assistance with understanding the regulations and working their way through the approval processes.” (Editor’s note: for a regular, in-depth look at the issues facing Chinese companies investing in Australia, please refer to our Correspondents’ column, China-Australia Trade & Investment, by Blake Dawson. This month’s column, on page 68, examines investment in Australian real estate.)
Meanwhile, in Canada, recent changes to the Investment Canada Act of 1985 allow the Canadian government to review foreign investments on national security grounds, regardless of the size of the target or of the investment.
Despite such regulatory hurdles and political opposition, some lawyers see a more measured response by Chinese companies to international fears about dominance. “It has been mixed, depending on the jurisdictions and the sectors,” says Stanley Jia, managing partner of the Beijing office of Baker & McKenzie. “While China’s increasing economic presence on the world stage has undoubtedly played a part in this new trend, China’s burgeoning foreign exchange reserves have been put to work. Most governments now evaluate foreign investment on a case-by-case basis.”
To be sure, China itself rejects foreign takeovers on political grounds. In March 2009, the Anti-Monopoly Bureau rejected Coca-Cola’s proposed US$2.4 billion acquisition of Huiyuan Juice Group, the largest foreign attempt to take over a Chinese company. “China may be invoking its power to intervene in mergers between domestic and foreign companies as a further means to shield its domestic industry from foreign competition,” Vincent Connor, Hong Kong head of Pinsent Masons, noted at the time.
A lawyer at Cadwalader Wickersham & Taft sees the novelty of Chinese investment as one of the main problems. “Thus far, we have found that target countries welcome Chinese investments,” says Joseph Bial, a Washington-based partner. “But these investments raise a host of new issues that require highly experienced attorneys who can bring to bear their experience in order successfully to navigate the relevant regulatory issues.”
Attitudes in Europe soften
In Europe, Chinese investment appears generally to face fewer hurdles. “We have not observed any significant hardening of attitudes towards Chinese investment in Western Europe,” says Björn Etgen, a Hong Kong partner and head of the China practice at Beiten Burkhardt. “The EU has always been engaged in a constructive dialogue with China.”
There are exceptions: a law has recently been passed in Germany that imposes restrictions on large foreign investorswhich have a close relation to the respective foreign government, suchas the Chinese sovereign wealth fund. “On the other hand,” notes Flanigan, “the German stock exchange in Frankfurt and some of the authorities involved have recently gone out of their way to accommodate the needs of the first Chinese companies to do initial public offerings in Germany.”
Others suspect that more difficult economic conditions in Europe have softened attitudes towards Chinese investment. “We spent more time dealing with regulatory issues with our Chinese clients than any other group of investors,” says Mats Hellström, founder of the Hellström law firm in Stockholm. “Now the climate is changing rapidly and Chinese investors are becoming more welcome now than before the financial crisis.”
US firms are also pitching for a slice of the Europe-China investment opportunities. Xiao at Vinson & Elkins recently visited Madrid as part of a Chinese delegation. While major Spanish companies such as Telefónica and La Caixa have invested in China, Shougang, for example, would like to do a tie-in with a Spanish company to access European and Latin American markets. “Spain welcomes Chinese companies,” Xiao says. “The Spanish economy has experienced problems in recent years and they see cash-rich Chinese buyers.”
Same bed, different dreams (again)
Lawyers say that one of the main challenges of advising Chinese clients on overseas projects is to master the differences in expectations on both sides. “Related to this is managing the ‘same bed, different dreams’ phenomenon which occurs so often in transactions involving Chinese and foreigners, even to this day,” says Richard Lawrence, a partner with Holland & Knight in Beijing. “In my years of advising on transactions involving Chinese and foreigners I have seen far too often parties entering into a venture in which they have widely different underlying assumptions and expectations.When that happens, it almost never works out to the satisfaction of the parties.”
Several firms set themselves targets early on in their involvement with China. Volker Potthoff, a Frankfurt partner with CMS Hasche Sigle, says necessary groundwork involves building up a trustworthy contact platform and relationship network; obtaining insight into Chinese business behaviour; bridging gaps between different habits, attitudes and culture in business and society; sensitizing Chinese companies and investors to the need for professional legal and other advice on overseas activities; and becoming familiar with negotiation styles, corporate governance structures and hierarchies.
Communication problems, lawyers add, are not always caused by differences in language. “The first challenge is to try to fully understand, acknowledge and accept the Chinese way of taking decisions, which may look to us inexplicably slow,” says Perrotto. “The second might be the cultural significance of words: even if both parties may be speaking in, say, English, the word may not convey the same meaning. As the cultural gap narrows, and Westerners know Chinese better, and Chinese come to know Westerners better, this is less of a problem.”
Tom Deegan, a Simmons & Simmons partner in Hong Kong, says communication with Chinese clients is a major issue that needs to be addressed by law firms. “China clients need to have advice delivered to them in a manner that’s straightforward and commercial in approach,” he says. “This is particularly important when they are venturing overseas for the first time.”
In response to such issues, both clients and law firms are attempting to institutionalize cooperative efforts to help Chinese investment abroad. The China Chamber of International Commerce runs programmes to train its members how to manage outbound investments into Spain, Portugal and Latin America. The Beijing-based China-EU School of Law – a government-sponsored joint venture between the China University of Political Science and Law and the University of Hamburg – offers professional seminars on Chinese outbound investments in Europe targeted to in-house counsel.
Most law firms cultivate relationships through several channels where Chinese companies seek recommendations for service providers. “We have established friendly relationships with several referral sources of Chinese prospective clients, including the Chinese International Institute of Multinational Corporations, the China General Chamber of Commerce, various Chinese law firms and provincial chambers of commerce,” says Mark Cowan, a Washington partner with Patton Boggs, a firm that has on occasion represented China itself in Washington.
Such relationships can help Chinese parties to understand the diversity of legal systems outside China and smooth the sharp differences that can exist between Chinese and non-Chinese involved in the same cross-border deal. “It is always a challenge to overcome a client’s assumption that the business and legal environment in a foreign country should be similar with that of his home country,” says Chunsheng (Tony) Lu, a lawyer at White and Williams in Philadelphia.
The stereotypical interaction is that of a Western party, unfamiliar with the niceties and decorum of Chinese negotiation, derailing or obstructing a deal through impatience or arrogance as the proverbial bull in a china shop. Often, however, the opposite is true. “Chinese clients are often surprised at just how bureaucratic Western countries and economies can be and they sometimes get impatient with the slow pace of doing business abroad,” says Flanigan. “Our experience is that cutting through red tape can be as much of a challenge in Western markets as in China itself.”
In addition, some lawyers say, it’s the Chinese parties who could show more understanding. “Very often the Chinese entities could do better in their efforts by realizing and having sensitivity for cultural differences, especially the understanding of the timing element in Western business transactions,” says Ulf Ohrling, the resident partner in Hong Kong and head of the China practice at Swedish firm Mannheimer Swartling.
American lawyers agree on the timing issue. “The one key challenge to working with Chinese clients is getting them to understand the American sense of time and urgency,” says Tang. “The Chinese side often takes a long time to decide on matters,” he adds. “On the other hand, the American side is eager to get a deal done and expects the Chinese side to respond immediately.”
Another issue is lack of transparency, according to Yung. “Chinese companies tend to act in more secretive ways and, while there may not be anything wrong with the underlying transaction, this lack of transparency can cause discomfort among the investment and regulatory community.”
When such impasses develop, law firms can also serve as key mediators, according to Christopher Stephens, managing partner for Asia at Orrick Herrington & Sutcliffe. “Negotiating styles differ dramatically between Chinese and European or American cultures, and experience on both sides is limited,” he says. “Often the two parties talk right past each other, with each side having little or no appreciation of the other’s circumstances, perspective or objectives.”
US firms in particular stress that the issues that might emerge between Washington and Beijing are for the most part temporary and cyclical. “These matters ebb and flow in terms of their significance as deal impediments,” says Jeffrey A Blount, head of the China and Asia Pacific practice groups at Fulbright & Jaworski in Washington. “The foreign investment environment is more restrictive now, but it will continue to liberalize.”
Other lawyers point out that despite differences, clients often can come together due to common goals. “The challenges for an international law firm working with China clients may seem insurmountable,” says Martin Cauchon, a Montreal partner withGowling Lafleur Henderson and a former minister of justice and attorney-general of Canada. “Our experience has been that the shared desire to get the deal done is sufficient to overcome these hurdles.”