“Steal a little and they throw you in jail. Steal a lot and they make you king.”

Bob Dylan
Guanxi either retires or goes to jail.

Rich Brubaker
Just read an absolutely fantastic china/divide post, written by Damjan DeNoble. The post is entitled, “Kro’s Nest, End of Days” and is it in on how a very well known Beijing expat, “Kro” of Kro’s Nest restaurant fame had his restaurant mini-empire “taken” from him by his Chinese “partner” (the words “taken” and “partner” are in quotes to show a lack of any real legal meaning). For some more background on Damjan’s relationship (in better times) with the Kro’s Nest, check out this post, “Getting All Personal About Doing Business In China.
I don’t know Kro and I don’t have a clue what went on with him and his Chinese “partner,” beyond what I have read in this article. But I (like just about every other lawyer who represents businesses) have a ton of experience with partnership disputes (broadly defined) and I am guessing that if I had gathered up the facts and written the article, it would have been very different. My article would have focused on one thing and one thing only –and it would have admittedly been way less interesting than Damjan’s article for having done so.
My article (like this post) would have focused on how what appears to have happened here has happened so many other times that lawyers do not even like talking about it. What happened here was a bunch of oral agreements by two people who never got around to legally formalizing their relationship. And then things changed (as they always do) and the partner with greater power took the business from the “partner” with less power. In this case, the Chinese national is ending up with the business because the business is on his “turf.”
Again, this sort of thing happens ALL THE TIME ALL OVER THE WORLD. Ask any lawyer who does business law about this sort of thing and then watch them roll their eyes. If they have been practicing a few years, they will almost certainly have their own emotional story to tell. If they have been practicing longer, they will probably just walk away. Too many stories to tell, none all that different. None all that surprising. And too commonplace even to get all emotional about.
Here is where we lawyers differ from the rest of the world.
We lawyers believe every single deal may end up going bad and we want to draft agreements/contracts to deal with that eventuality. Real people believe their friendship/common business interests will carry the day and that the goodwill that has started the business will be there next year and next decade.
I had a great talk the other day on this topic with a Michigan lawyer with whom I am working on a China matter. He told me of his having formed a domestic company in which the two owners insisted everything be done by consensus. The owners refused every lawyer entreaty to put anything in their agreements about how to resolve ownership disputes. The two owners spent millions on the business, and then, unbelievably quickly, they started disagreeing on virtually everything. The business stagnated and without any mechanisms in place for dealing with disagreements, they ended up selling out for pennies on the dollar.
I told this lawyer my recent story of a very prosperous U.S. company that had been formed maybe 15 years ago by an American and a Russian. It started small with no written agreements between them and then it grew really big and really international (Russia, Korea, China, Japan, Vietnam), but still with no written agreements between them. Then disputes arose between the two owners and then the Russian sued the American for millions of dollars and then the case took three years and then my firm won the case at trial and then the Russian appealed and we are now waiting for the appellate court’s decision. You can read more about that case here and you can listen to the appellate oral argument here.
Not that long ago, I had a guy in my conference room break down and cry because his business in China had been “taken” from him in a situation not all that different from that described in Damjan’s Kro’s Nest article. This person said that in addition to having lost nearly all his money, what really got to him was the realization that he had wasted the last five years of his life killing himself to build up a business he loved and now it was gone, right when it had “really started to take off.” I didn’t have the heart to tell him that these sorts of things always happen right when the business has just taken off. The sad reality (again, which we lawyers know all too well) is that people fight way more often over a valuable business than a failing one. With failing businesses, disputes among the owners often just lead to one or both of them walking away.
Anyway, I urge you to read Damjan’s post as a classic cautionary tale. And on behalf of lawyers everywhere, please do consider listening the next time you feel your lawyer is being too cautious.
For similar examples, check out the following:
Take A Time Out On Foreign Publishing In China
That’s China and It Ain’t Always Pretty
That’s China And It Still Ain’t Pretty, But Now It’s Better Explained
UPDATE: Just learned from the Adam Daniel Mezei blog that Beijing Boyce also did a nice piece on the Kro’s troubles and two excellent points:

While I have not talked to all of the players in this situation, I would make two general points. One, in a city where it seems like half of the foreigners I know want to open a bar, cafe, or restaurant, this is yet another case that shows the importance of getting your legal house in order from the start. Two, while this is a conflict between an expatriate and a Chinese, I have seen problems arise between Chinese partners and between expatriate ones. In other words, problems can arise regardless of nationality when money is involved. Both of these points sound obvious, but…

UPDATE: In a post entitled, “Kro’s Nest roundup,” the Heart of Beijing blog nicely summarizes the various articles/posts on this issue,

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 AVVO.com (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.