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Five More Things About China Deals That Differ From The West. It's The Government, Stupid.

By Dan Harris and Steve Dickinson

A few days ago, I did a post borrowing from and remarking upon an excellent post by Geraldine Johns-Putra on five ways doing deals in China differs from doing deals in the West. I loved her first post and she has just come out with a second, entitled, "Ten things about doing deals in China that are different from the West ? Part 2," which is also so good that I would be remiss if I were not to follow up on that one as well. This time around Ms. Johns-Putra focuses on the approval process in China for getting a deal done and she rightly notes how different this is from the West and how confusing this can be: Government approvals: Ms. Putra calls this one of the "key things about Chinese deals that are different from the West" and she is absolutely right. Much of what foreign companies do in China must be properly registered with the authorities or it just does not count. My firm has been called in to "clean up" many a deal that was flawed because the foreign party had failed to secure proper registration. If there is one tip to be gleaned from those matters it is that it you will find it far easier, far cheaper and far more likely to meet with success if you properly register your deal at the time of the deal then to try to backtrack and fix things after your relationship with your Chinese counter-party has gone bad. You should also never rely on your Chinese counter-party to do this registration. Nine times out of ten it will be the foreign party that will end up paying for a failure to register and so it is incumbent upon you as the foreign party to make sure it is done and done right. At least half of the botched failure to register deals on which my firm has worked arose from situations where the Chinese company had assured the foreign company that it would "take care of all necessary China filings." It is your company and your deal on the line and it never makes sense to put all that into someone's hands who may have very different incentives than you do. Feasibility study reports: Ms. Johns-Putra does a great job explaining this:

Very much a feature of the approval process, the feasibility study report has traditionally been viewed as a necessary evil, but not too problematic. The aim of the document, as the name suggests, is to present a business case to the government authority responsible for approving the transaction. It used to be the case that a feasibility study report was a document that was very much modelled on a precedent. This is changing to some extent, especially as the policies of the Chinese government have also changed in the last 2-3 years and are favouring certain sectors and technologies (e.g. renewable energy) as well as homegrown innovation and developing export markets. As a result of these changes to policy, a little more creativity is required in preparing FSRs to show how deals will satisfy these new policies.

The government has a seat at the table: Ms. Johns-Putra points out that even after the parties have agreed on the deal, the Chinese government oftentimes likes making its own requests. Ms. Johns-Putra notes, correctly, however, that the "person at the government end is just trying to do their job. In my experience, they will accept reasonable answers to their queries." I concur. Buffers: Ms. Johns-Putra correctly points out how you will need someone Chinese to deal with the Chinese government on your behalf. She is absolutely right. My firm has plenty of lawyers fluent in Mandarin and yet we virtually never have any of them meet directly with the Chinese government simply because no matter how good their Chinese, they are not Chinese and they are not Chinese lawyers. Because even Chinese who work for foreign companies and Chinese who live in the United States can be viewed with suspicion, we use trusted Chinese lawyers from our affiliated Chinese law firms. Foreign exchange regulations: Again, I will simply defer to Ms. Johns-Putra, who states it beautifully:

The foreign currency exchange angle can be neglected in the excitement of getting a deal signed and approved, but it is sometimes the last and trickiest obstacle to completing an investment. The basic approach is that currency exchanges on current account (i.e. trade payment flows) don?t require approval from the State Administration for Foreign Exchange (SAFE) but trades on capital account (i.e. investment payment flows) do. SAFE approval is, generally speaking, therefore required for foreign investments. It is best to try and sort out the requirements as early as possible. You also need to be prepared for particular requests to come from the bureau you are dealing with. SAFE requirements can differ from province to province and city to city in the actual paperwork required. Don?t forget this. If you get SAFE approval for the relevant currency transfer on your M&A deal, then, and only then, has the fat lady sung.

Doing deals in China is very different from doing deals in the West, but that just means it has its own rules, foibles and inconsistencies. This post and our previous post (thanks obviously in large measure to Ms. Johns-Putra) set out ten differences. Ms. Johns-Putra concluded her post by making clear she would like to hear of more. I would too.

Full post as published by China Law Blog on March 08, 2010 (boomark / email).