Chinese Companies In America. A TwoFish Rebuttal.

The other day I did a post linking over to an article I recently wrote for the Wall Street Journal, entitled, "Chinese Companies Court Disaster," [if you cannot read the whole article, email to yourself] on how Chinese companies are falling down badly when it comes to understanding the American legal system and using American lawyers appropriately.  

Regular CLB reader and commenter TwoFish vehemently disagrees with me and he made this abundantly clear in two long comments (here and here) he left to that post. Though I am not backing down an inch (if anything, I wish I could give specific examples, but for attorney-client reasons, I cannot), I respect TwoFish's viewpoint and I think it so important it be heard, I am moving them from the comments section into this post. So without further ado here's TwoFish, along with me putting in my two cents worth in bold italics:

I don't think this is true at all. My personal experience is that large Chinese companies that are doing or planning to do business in the United States are perfectly aware of the legal environment in the United States and acting accordingly. (Also, it's important to be clear here that we are talking about the United States and not the West. The US is unique in being particularly litigious.) TwoFish, I am guessing you are dealing with sophisticated Chinese financial or technology companies.  I have dealt with those companies too, and you are for the most part right. But I have also dealt with massive state owned Chinese industrial companies and they have, for the most part, been wholly unprepared to deal with the United States.

Smaller companies tend to be less aware, but when made aware of their legal exposure in the United States, generally find that their assets in the United States are often not high enough to justify legal planning to fight a lawsuit. The strategic plan is "if we get sued, we pull out" which as far as I'm concerned is a perfectly good one. Also a lot of the strategic planning that I have seen with smaller and mid-sized Chinese companies involves not so much litigation planning, but setting rather up their asset and corporate structures so that if they lose a lawsuit in the United States, that their ability to do business is not impaired. The typical structure would be to create a US subsidiary of an offshore corporation in HK or BVI such that if they lose a lawsuit in the US, the judgement is going to be against an empty shell. The parent Chinese corporation is judgement proof, and the US corporation can be folded and a new corporation started which is not subject to the liabilities of the old corporation. Something else that I have seen is that with Chinese companies is that when they are made aware of the legal costs of doing business in the United States, rather than hire lawyers, their reaction is not to do business in the United States at all. Which again is a rational response. All I can tell you is that too many Chinese companies seem convinced that nobody will ever be able to reach their assets anywhere, but that has not been the case.  There are plenty of countries out there that will enforce US breach of contract judgments and plenty of additional countries that tend to grant summary judgment on these judgments (or the equivalent).  You are attributing brilliant strategy to what is in many cases just plain bumbling.

And again the fact that we are talking about the US rather than the "West" makes a difference. You can decide to do business in Canada or the EU, where you don't have to deal with lawsuit non-sense, and a lot of Chinese companies do just that. This could be industry dependent (I'm in banking and finance). Anecdotally, I know of some Chinese companies that were forced to pack up and go home, but I don't know of any situations in which a Chinese company was seriously damaged by packing up and going home, and in the cases that I'm aware of "packing up and going home if we get into trouble" *was* part of the strategy. Also, I don't know of any companies that were shocked by the US legal system. I am talking about the United States, not so much the West and the U.S. is a tougher legal place to be than maybe anywhere else.  I do not think I have dealt with any foreign company (including large and sophisticated Canadian and British and Korean and Russian and German companies) that has not been at least surprised by the extent of discovery allowed in the United States and the sorts of damages that are awarded. The Chinese companies are no exception.  

One big asymmetry with China is that Chinese tend to be much, much more knowledgeable about the United States than Americans about China (although this is changing.) Even if you don't take into account the large number of Chinese that have spent large amounts of time in the US, you just run into the fact that more Chinese can read English than Americans can read Chinese. I should also point out that it's not that hard to set up your US corporate structure and that it is easy to "pack up and go home." It's trivially easy to get up a US corporation and to have assets in that corporation, and it's trivially easy to move assets into and out of that corporation. You are just wrong on this. In my experience in many different courts in the United States, judges are very quick to find fraudulent transfer if they suspect a company has moved assets to avoid a judgment.  Very quick.  

There are ways of enforcement a judgement against an associated corporation, but these tend to be in practice useless if one of those corporations is offshore. (i.e. if you route your assets through BVI or HK, you aren't going to know who to sue and where to serve the summons, and good luck trying to find what banks accounts have money.) By contrast, Chinese law is set up to intentionally make it hard or impossible for foreign companies to pack up and go home. A moments thought should make it obvious why Chinese government official obsess about minimum capital requirements, and require that you have large amounts of physical assets in China, and make it annoying to convert from RMB to USD. This completely ignores the fact that the United States is a massive market for Chinese companies, even those no longer located in the United States. Those who sell into the United States can have their assets (payments) seized in the United States.  

It should be noted that there are Chinese companies that intend on large capital investments in the US, but these companies tend to also pay top dollar for extremely high priced legal and governmental relations firms in NYC and Washington, DC. Once you are that level, then your main challenge aren't lawsuits, since you just deal with US lawsuits the same way large US companies do (stonewall and settle). The main challenges are regulatory (i.e. getting CFIUS approval and getting approval from the Fed, the SEC, Treasury, Commerce, and the USDOJ) and then dealing with the same set of regulators in China. Again a lot depends on which Chinese and which Chinese companies you deal with, but having seen large Chinese SOE's hire dozens if not hundreds of lawyers (who often tend to be Chinese having gone to Harvard or Columbia law school) to deal with the intracracies of CFIUS and USDOJ anti-trust review and the details of getting exemptions from the Federal Reserve to avoid being classified as bank holding companies, I just can't accept the idea that "Chinese companies just don't understand US law" and are unprepared for it. That was not what my article was about. It was how they are unprepared for US litigation. Chinese companies tend to use NYC lawyers for their IPOs because the investment bankers require this.  Beyond that, they are unprepared for the U.S. legal system, particularly litigation.  A couple of Chinese companies have told me this. You also make it sound as though there are hundreds of experienced Chinese language commercial litigators in the United States, but I am not aware of a single city with more than a handful.  

Also, I'm not aware of any particular problems that Chinese companies have with IP lawsuits. The types of IP lawsuits that the big Chinese companies find themselves in the US, are the same types of lawsuits that large domestic technology companies routinely file against each other. Cisco recently filed a major lawsuit against Huawei, but Oracle also just filed one against Google. One reality of how IP really works with large technology companies. In some high technology areas, it is impossible to do anything without infringing on some patent, and so large companies deal with this by maintaining cross-licensing agreements and defensive patents. You sue me, I counter-sue you, we settle.  This is not what I am talking about at all.  I am talking about Chinese companies being accused of having engaged in  conduct here that would be bound to get them sued.

The other fact that makes large companies different from small companies, is that if you are a large company with deep pockets, you will spend a lot of your time defending yourself against lawsuits. Any large company with deep pockets will typically have dozens if not hundreds of lawsuits pending against it at any given time, and the cost of dealing with lawsuits is basically the cost of doing business in the United States, and something that is simply factored in a business decision. If you ask any in-house counsel of any large corporation what the corporation can do to eliminate lawsuits, the answer is essentially that you can't. By being honest and producing quality products, you can reduce your liability, but you still have to deal with the cost of lawsuits even if you do everything right.  That is true and what I am saying is that I am seeing Chinese companies (both large and small) that do not seem to understand the legal benefits that stem from "being honest and producing quality products."  

However, this gets to another question which is why a Chinese company would want to do business in the US at all. US businesses do business in China for basically two reasons cheap labor and new markets. If you are a small Chinese company, you are going to be able to take advantage of new markets by just staying home. It can be in your strategic interest to "go global" but there are other countries where it is just easier to do business than the United States, and even among industrialized nations, there are other countries that may be easier for a Chinese company to do business in than the United States (Australia, Canada, and Singapore). I am seeing a number of manufacturing companies that want to do business in the United States so that they can capture higher margins.  

The only two reasons that I can think of for a Chinese company to do business in the United States, are that the United States is still the world's leader in technology and process management, and there is a lot of stuff that a large Chinese company can learn from doing business in the United States, and that China has large reserves of capital which can be used to fund US businesses. However in the second case, you bypass most of the legal headaches by just being a passive investor in a company. Instead of trying to run a company in the US, just take your cash, buy a minority stake in the company, and let the managers run the company. You are ignoring the profit margins here.  Also, Chinese companies want American brands because they know those have greater respect around the world.  

Getting access to US technology and know-how is something that a lot of Chinese companies are very interested in. However, if you want something from the US, that you can't get from say Finland or Australia, then the odds are very good that the US is not going to give it to you. In any case, you will be hiring dozens of lawyers and lobbyists filing applications for CFIUS review and export licenses with the US Department of Commerce, and the odds are very good that you will be in some sort of joint venture with a US technology firm which means dozens more lawyers. More often than not, you as a Chinese company will walk away when you look at what you are up against and the fact that the final answer is likely to be NO!!!! This certainly does happen. 

I don't have a huge amount of experience with SME's, and most of what I've seen up close involves large US and Chinese companies, but in those situations I have absolutely not seen the sort of misunderstanding of the US legal and business system that the original articles implies Chinese companies have. Usually when you have a big Chinese company that is considering a move into the US, they already have an in-house legal department that is staffed with returnees that went to school in the top US universities, lived in the US for an extended period of time, and often have experience with a US law firm before being poached by the Chinese company. This is just not true of all but the most sophisticated Chinese company. What I see at least as often are massive SOEs that may or may not have one or two foreign lawyers who never really practiced law anywhere before going in house with a Chinese company at a paltry salary where they can be the token Laowai.  For that matter the major law firms that handle these sorts of mega-cases hire a lot of Chinese from the big name law schools. I have seen one basic reality which is that good lawyering matters less than lawyers sometimes think it does. There are a lot of situations where a deal is doomed from the beginning for business or political reasons, and sometimes you are just not going to get that export license no matter how good your lawyers and lobbyists are. Even when good lawyering can make a difference, there is the issue of cost. Good lawyers cost a lot of money, and sometimes when you add in the possible costs, its just not worth doing business in the US. In that case, there's no need to spend the money going into the details of the law or thinking too much about strategy in the US.

There is another basic reality which is that the United States is the most powerful country in the world, and there is a lot of worry within the United States that China may displace or challenge US global power. One thing that is striking when you talk to someone that is not American is how people outside of the United States view those concerns differently. It may matter a lot to an American if the US or China is the worlds most powerful country. It matters a lot less to a Canadian or a Malaysian, so in the United States you are going to have a degree of suspicion and nervousness about Chinese businesses that you just don't see in say Canada or Australia. I generally agree, which is all the more reason why Chinese companies that come to the United States cannot afford to make mistakes.  

I do not dispute there are plenty of Chinese companies coming into the United States with intelligent overall strategies, but from my perspective having represented a whole slew of foreign companies coming into the United States, Chinese companies are the least equipped of any country's companies with which I have dealt.  I do expect that to change eventually, as word starts reaching China (which I know is already happening) but I expect this will take a long time and in the meantime, Chinese companies will suffer here.