A couple of months ago, co-blogger Steve Dickinson, wrote an article [link no longer exists] on China mergers and acquisitions for China In Business Magazine. Towards the end of that article, Steve set out, in layman’s terms, the following realities of China M&A:
● Foreigners are permitted to purchase small Chinese companies that the central government is not interested in managing.
● Foreigners are permitted to purchase large, state-owned enterprises that suffer from financial difficulty, provided the foreign investor agrees to restructure the purchased company.
● Foreigners are permitted to purchase non-majority interests in strong, successful Chinese companies, but only if there is some added benefit, such as transfer of technology, advanced management or access to foreign markets.
● Foreigners are not permitted to purchase a majority interest in a large and financially successful Chinese company. Even smaller companies are off the table if they are financially sound and work in a core technology field or have created a strong or historically important brand.
Agco, the world’s third largest tractor manufacturer, apparently has not been listening. In a recent Financial Times article, entitled, “Agco chief ploughs a difficult furrow,” Agco CEO, Martin Richenhagen, expresses his frustration with trying to “take a majority stake in First Tractor, a state-controlled company that is the country’s biggest tractor maker.”
Richenhagen offers the following opinions on Chinese law:

“There is no proper written law in China,” says Mr. Richenhagen.
“A lot of what is described as law is decided on the basis of feelings or political fashion,” he said.

The article notes that “US-based Deere, the world’s biggest farm equipment maker – already has a factory in China.” That is the difference. Deere recognized what the Chinese government has been saying for years: that foreign companies are generally free to come into China to create something new, but that the government will be very wary in allowing foreign companies to take a majority stake in a big, thriving, Chinese company, particularly one that might be tied to defense.
Steve’s commentary on the article is as follows:

1. The Chinese government is never going to allow a majority takeover by a foreigner of a major state owned manufacturer. Foreign investors who continue to take this approach to investment in China are wasting their time. The most the Chinese will allow is a minority stake if this benefits China by injecting capital, transferring technology or providing access to new markets.
2. The unwillingness of the Chinese side to allow for control over a joint venture is standard policy. Even when the Chinese allow for a greater than 50% ownership in a joint venture, they nearly always take action to ensure that the practical control of the venture stays on the Chinese side.
3. China is very clear on its policy. If a company wants to come to China and create a new tractor factory, China welcomes the investment. Unlike many countries in Asia and elsewhere, China generally will not restrict the investment to protect its domestic enterprises. That is why China is the number one recipient of foreign investment. The laws and regulations on such foreign investment are clear and complete. What China will not allow is foreign purchases of existing domestic enterprises.
4. The complaints in the article about Chinese law and policy are not fair. The problem for this investor is that it is trying to do something not permitted under Chinese law and policy. We get similar comments all the time from potential investors. They ask us how things work in China and we tell them. Then they complain that this does not fit with their idea of how China should be. Often they ignore our advice and waste much time and money doing something that is not possible in China. This is their mistake; it is not a matter of lack of law in China.

Can you hear me now?

Photo of Dan Harris Dan Harris

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network. 

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network.  His work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

He was named as one of only three Washington State Amazing Lawyers in International Law, is AV rated by Martindale-Hubbell Law Directory (its highest rating), is rated 10.0 by (also its highest rating), and is a recognized SuperLawyer.

Dan is a frequent writer and public speaker on doing business in Asia and constantly travels between the United States and Asia. He most commonly speaks on China law issues and is the lead writer of the award winning China Law Blog. Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed Dan regarding various aspects of his international law practice.

Dan is licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at his firm, Dan focuses on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.