Just got a PR email touting a podcast by John Jullens, a Partner at Booz & Company based in Shanghai.  The podcast sets out eight “best practices” for partnering with a Chinese business and though none of the eight should be the least bit earth shattering for anyone doing business in China or with China, they do all make good sense.  Here they are as set out in my email, with my comments in italics.  

  • Focus on filling capabilities gaps by selecting a partner who is demonstrably able to provide the organizational capabilities a business needs to be successful in China.  In other words, partner with a Chinese company that actually understands China.
  • Don’t be fooled by guanxi, the importance of which is often overestimated and can deter focus from the goal of filling capabilities gaps.  I agree.  For most industries, there are many things more important than guanxi.  For more on the overvaluing of guanxi, check out How We Really Feel About China, Part I: Guanxi
  • Drop the marriage metaphor. This is consistent with Chinese antitrust laws, which allow for “non-monogamous” arrangements, such as joint ventures with more than one partner, including companies that are direct competitors.  My advice here is merely to be flexible.  Set up your deal so that the legal side serves the business side, not vice-versa. 
  • Keep on triangulating to fill data gaps. Because much data is simply not available or transparent in China, foreign businesses must create and constantly maintain their own information base by interviewing officials, friends and business leaders.  Put more simply, make sure that you know your Chinese partner and to know your Chinese partner you must conduct due diligence that goes beyond just documents.  For more on China due diligence, check out Doing Business In China Safely. The Due Diligence Basics.
  • Conduct a thorough stakeholder analysis before signing a deal to identify your Chinese partner’s key decision-makers and influencers, whose identities, interests and roles may not be clear initially. This is particularly important when dealing with Chinese businesses, where the key decision-maker(s) is oftentimes not clear.  
  • Clarify decisions rights up front to prevent unexpected actions by a Chinese partner.  For example, the Chinese partner of a western business once exchanged its entire management team with that of a direct competitor.  This definitely makes good sense. The thing I would add here is that you should not assume anything and, in particularly, you should not assume that your Chinese partner does business even remotely the same way that you do.  
  • Go easy on the integration so as not to impose your business’ processes and standards on a Chinese partner to the point of destroying its unique capabilities and value.  I agree and I think this is important.  I have seen too many deals in the United States where company A buys company B because of what company B has to offer and then goes in and completely remakes company B in company A’s own image, literally stripping off all of what caused company A to buy company B in the first place.  I think this tendency is even greater in transnational deals.  
  • Find ways to earn trust by stressing your long-term commitment, empowering the local deal team and showing respect for your Chinese counterparts. Sure.  Why not?  
What do you think?   What else do you recommend for succeeding at China M&A?

Last week, China came out with some guidance as to how it is going to determine whether foriegn company acquisitions (M&A) endanger China’s national security and there have already been all sorts of articles speculating that this is going to mean a real crackdown on foreign acquisitions. I was going to wait a few weeks to write on this, but since Stan Abrams over at China Hearsay just did such a nice job covering it, I am going to write on it now.

I like Stan’s view of it because it comports with mine. In his post, entitled, “Reciprocity and Slippery Slopes: China’s New M&A Review System,” Stan tells everyone to relax. I could not agree more.

Stan bases his advice on the following:

1. China’s laws often start out with little detail and then it “sometimes it takes years before additional guidance (e.g. from the Supreme Court) or simply a track record of judicial action lets us know how a new law is going to be enforced. In other words, let’s not get too excited about the broad language in the scope of this review body just yet.”   

2. “Beijing has always been big on reciprocity. If a foreign government does something to China, or Chinese companies, there is a good chance that Beijing will strike back in some way. We’ve seen this with trade and investment matters, visa procedures, etc. To some extent, this national security review is a reaction to similar bodies abroad that have hindered efforts of Chinese companies to engage in offshore acquisitions.” China is likely to treat companies from other countries similarly to how those countries treat companies from China. 

3. China already has plenty of ways it can block deals so there is no reason to think it has added this national security review simply to do so.  


By the way, if you are not reading China Hearsay, you should be. There used to be a number of excellent China law blogs out there, but with the exception of China Hearsay, few if any of those post wtih any real regularity. It really is pretty much just us two now and so if you read us, I urge you to read China Hearsay as well. Stan’s blog is generally more analytical and less nuts and bolts than this one, which is all the more reason to read us both.   

Been spending my Saturday deleting old e-mails and came across one that we sent to a client setting out the starting point for the due diligence we would need to undertake surrounding its stock purchase of a small to mid-sized existing China WFOE. This was the initial email where we were setting out the sorts of things we would need to do as part of the due diligence investigation to make sure that what our client thought it was buying was what it was actually buying.

The thing that strikes me about the list is how it is really no different from an initial due diligence list we would be drawing up for a stock purchase of any company pretty much anywhere in the world.

Here’s the list:

Purchase of stock in Beijing WFOE: Basic Required Documents

  1. Company documents: articles of association, business license, WFOE approval, listing and record of appointment of directors and officers, etc.
  2. Annual audit and tax returns and all communications with and notices from the tax authorities, both national and local.
  3. Real estate documentation: ownership, lease, mortgages, etc.
  4. Employee list, and copies of employee contracts and records for tax and social welfare payments.
  5. Insurance documents.
  6. Significant existing contracts with vendors and customers.
  7. Current financial statements.
  8. Record of distributions to shareholders.
  9. Listing of lawsuits and other claims, if any.
  10. Listing of hard assets and vehicles.
  11. Intellectual property: trademarks, patents, copyrights, technology licenses.
  12. Listing of loans payable and guarantees payable and contingent, if any.
  13. Environmental approvals/licenses and annual environmental inspection reports

The biggest differences we usually see between a Chinese company acquisition and a domestic company acquisition are the following:

  • The books of the Chinese company are usually in not terribly good order and it is not at all uncommon for the company to have two (or more) sets of books.
  • Chinese companies tend to be more unwilling to turn over their books and records than U.S. companies.
  • Many, if not all of the documents of the Chinese company are, logically enough, in Chinese.
  • China requires far more government sign-offs and registrations than the United States.

But overall, the goals and the strategies are not all that different. In both cases, the goal is to find out as much as you can about the company to be acquired and to structure the deal in such a way as to maximize the returns for your client going forward.

For more on doing the China deal, check out, “Five Things About China Deals That Differ From The West” and “Five More Things About China Deals That Differ From The West.

This post was written by Simon Malinowski, a Harris Bricken summer associate.

There is a terrific podcast interview between Kent Kedl and Dr. Kim Woodard [link no longer exists] on deal cultivation in China mergers and acquisitions on the China Business Blog. The podcast is entitled, “Deal Cultivation in China M & A.” and though its focus is M&A, its wisdom on China business applies across the board.

The podcast focuses mostly on pre-due diligence, which Kedl and Woodard define as the information necessary to evaluate acquiring a company in China, and on the importance of building a strong, trust-based relationship to ensure a smooth pre-due diligence process. Though the importance of building a strong relationship is not unique to China, Kedl and Woodard note that this should take place earlier in the process for deals in China than in the U.S.

In China, the pre-due diligence phase is vital for setting the tone for the entire relationship between the foreign company and its Chinese target because at that point everything is still malleable. There is no contract in place and there is still the opportunity to walk away from a prospective deal. With M&A, this opt-out ability is typically inherent in the non-binding letter of intent.

Foreign companies can best develop a strong trust-based relationship with their potential business partner or target in China through lots of golf, an affinity for tea-houses, and a willingness to endure a prodigious volume of second-hand smoke. Though the first of these is not foreign to Western companies, with respect to the last two, Kedl notes “now is the time to start learning new things.”

The importance of building trust on local terms gets to the heart of the matter.  The US way of doing things by bringing in lawyers and accountants and other outside “deal-makers” at the first step of the process is still foreign to Chinese business.  Cultivating a deal on Chinese terms can go a long way towards towards what should be your ultimate goal: a trust-based relationship with your Chinese target company.

Kedl and Woodard also discuss how a strong level of trust increases the likelihood the Chinese target company will disclose its own shortcomings.  In China, almost every company circumnavigates at least some of the government’s various bureaucratic requirements or as Kedl and Woodard so eloquently put it, “there is no spotless laundry.”

I recommend you listen to the entire podcast here.

the Organization for Economic Co-operation and Development’s (OECD) just released a report on foreign investment in China.  The OECD report focuses on China’s policies regarding cross-border mergers and acquisitions (M&A) and notes that though “some progress has been made” in easing the rules and regulations for cross-border mergers and acquisitions, still “more needs to be done.” The report calls on China to “make its rules and regulations for cross-border mergers and acquisitions more open and transparent to attract more and better foreign investment.”

The report specifically calls on China to do the following to improve foreign M&A in China:

  • Streamline the approval process for cross-border M&A and make it more transparent;
  • Put in place a sound competition framework;
  • Further open capital markets to foreign investors;
  • Encourage Chinese companies  to increase corporate transparency and provide more up to date and accurate financial information to make it easier to value a potential acquisition, especially regarding a firm’s liabilities;
  • Relax foreign ownership restrictions. In particular, revise existing catalogs that list the type of firms that can or cannot be acquired by foreign investors.

The report also recommends China pilot test these recommendations in the North-East of the country before rolling them out nationwide. The report states that this region, China’s historical industrial heartland, has a high concentration of state-owned firms needing restructuring and technological upgrading, as well as high unemployment and low productivity. The report contends  that cross-border M&A could help rejuvenate the region’s economy.

One of the biggest problems facing private Chinese businesses is finding money to grow.  These companies are essentially cut off from both bank loans and the Chinese stock exchanges and, as set forth in the OECD report, China’s M&A laws make foreign acquisitions relatively difficult.  In the next few years we foresee a big influx of western venture capital (VC) firms providing secured and unsecured funding to dynamic Chinese private companies in return for equity stakes and other compensation.