Assembling an effective transaction team - International Law Office

Introduction
In-house team
External team
Comment

Introduction

Many Western European and US companies, including those looking for M&A opportunities in China, have thinned the ranks of their middle management in pursuit of shareholder value. A project in China is likely to be more involved and time consuming - and therefore more expensive - than most foreign companies initially forecast. For this reason, many foreign investors in China face difficulties in assembling a successful team to implement their project.

Having an export manager deal with the project on a part-time basis may result in the project being given a lower priority than it deserves, whereas having a middle manager in the role on a full-time basis and allowing his or her professional future to become tied to the project may mean that the deal becomes destined to proceed, regardless of whether it makes commercial sense.

The most successful project teams work as such and, in doing so, accomplish far more than individuals. A suitable team for a transaction with a Chinese party typically consists of an executive-level member, a business development manager, an in-house lawyer and a technician. In addition to these in-house members, a team normally relies on external support from lawyers, accountants and consultants.

In-house team

Executives
In China, it is often difficult to close a deal without the assistance of an executive-level negotiator. However, it is generally a mistake to bring such head-office personnel into the process too early; it may be better to call on them only when closing the final points of the deal, rather than involving them in minor wording issues.

Business development managers and project managers
Projects without a dedicated project manager or business development manager tend to proceed slowly. Ideally, the manager should not be the person who will implement the project (in the case of a joint venture). This may appear counterintuitive, but although a dedicated project manager is good for a deal, an over-dedicated project manager can be a disaster.

Project managers who will ultimately implement the project as general managers of the joint venture may tend to compromise too easily on issues that are significant to their company while insisting on points that are not critical from a corporate perspective, but may have a major impact on the general manager's role. If there is already a clear candidate for the position of general manager, it is useful to have him or her involved in the discussions, but not leading them.

In-house lawyers
For many project team members, an in-house lawyer represents their worst nightmare: the lawyer they cannot fire. However, a good in-house counsel often plays a key role in a project in China if he or she:

• has a sound understanding of the foreign company involved in the project, allowing him or her to judge what is feasible;
• can ensure that resources from headquarters are brought to bear as required; and
• can keep outside counsel focused on the project.

Occasionally, a project may be obstructed by an in-house lawyer who seems to block everything. There is one reliable solution: invite him or her to attend deal negotiations in China. Most project negotiations take place not in metropolitan Shanghai or Beijing, but in relatively remote areas. One trip is normally enough to change an in-house lawyer's attitude - if he or she is unwilling to make the journey to deal in person with what he or she regards as a crucial issue, he or she may be more willing to concede that it is difficult to second-guess negotiations from thousands of miles away.

Technicians
Almost all investment projects in China have a technical or technological element. The technology is normally an integral part of the potential risk, as well as being crucial to success. Nevertheless, almost all joint venture projects are negotiated without the participation of technicians. Input from technical staff is crucial in:

• determining how to protect technology;
• assessing what technology should flow to China; and
• deciding how to transfer technology to China.

External team

Most companies engaging in a project in China need support from external consultants. However, assembling an external team is often more difficult than selecting internal team members.

China consultants
An unsuspecting foreign investor may be surprised to find how helpful everyone is in China - it often seems as if China's biggest sector after manufacturing is consulting services in relation to China. One of the reasons that multinationals perform relatively well in China is the depth of their management. However, medium-sized companies often need external support for their projects and find that there are many consultants from which to choose.

The China consultant can be a blessing to an inexperienced investor. However, it is vital to choose someone who understands the investor and its aims. Furthermore, responsibility cannot be outsourced. The investor must remain deeply involved in the project - if it fails, it will not help to blame the hired hands.

Generalist China consultants often have relatively little knowledge of the client's industry, relying instead on their knowledge of China, its business culture and the power of personal connections and mutual confidence and understanding summed up in the Chinese word 'guanxi'.

China clearly differs from Europe and the United States in many ways, but it is not the enigma that many consultants claim. Unscrupulous consultants will seek to present China as more unfathomable than it is in order to retain their role in a project. In making the Chinese market seem mysterious (or even dangerous), they may try to convince a would-be investor that their guidance and well-placed contacts are vital to a medium-sized company on new territory. Faced with such claims, a foreign company's team should retain their sense of perspective. Most things that make business sense overseas also make sense in China. Contacts help, as they do everywhere, but they are not the only factor. A consultant who insists that he or she is crucial to a project, as opposed to becoming crucial by doing a good job, may provide far less help than he or she claims.

Moreover, for many consultants it is not the success or failure of the project that matters, but whether the deal proceeds. To this end, an unscrupulous consultant may prepare a feasibility study with an unrealistic worst-case scenario that is only slightly worse than the best-case scenario.

However, consultants can play vital roles. A foreign investor's team must select a consultant with whom they feel comfortable and who can cover shortcomings in manpower or expertise within the investor's organisation.

Certain commentators on negotiation in China have attributed great importance to intermediaries. One study of the subject insists that "only a native Chinese speaker can read and explain the moods, intonations, facial expressions and body language Chinese negotiators exhibit during a formal negotiation session".(1) However, if in order to communicate with the Chinese partner an in-house team needs someone to analyse moods, intonations, facial expressions and body language, it is worth considering whether to find a Chinese partner who is easier to deal with. The ultimate success of a project is determined not by signing a contract, but by establishing a successful venture. During the project implementation phase, the intermediary will be brokering other deals and the communication problems between the parties will remain unresolved.

The same commentators cite what they consider to be an example of successful intermediation:

"A vice president of a New York-based software company went to Beijing to negotiate a distribution contract with a Chinese research institute. Having attended meetings arranged by the intermediary - a former senior executive with the institute - the vice president was pleased with the progress during the first two days. But on the third day, the two sides became embroiled in a fruitless debate over intellectual property rights. Feeling they were losing face, the Chinese ended the meeting. That night, the vice president and the China country manager met with the intermediary. The following day, the intermediary called the head of the institute and worked his magic. In the end, both sides agreed that the intellectual property rights were to be jointly owned, and the contract was signed."(2)

This passage sums up the problem with using intermediaries in China: such intermediaries normally convince the unsuspecting foreign party to agree to its Chinese counterpart's wishes. As the intermediary was formerly a senior executive of one party, it was unlikely that he would switch allegiance to the other. An intermediary, especially one with links to the Chinese partner, often grants the latter a significant advantage in negotiations. The intermediary will allow the Chinese side to know what the foreign side is thinking and will normally push for the easiest way to an agreement, which is often to persuade the foreign partner to agree to the Chinese partner's proposal.

The solution was that the US software company agreed to joint ownership of the IP rights with the Chinese distributor. Granting a distributor IP rights may be a questionable step in itself, but in any case it is difficult to see what benefit the intermediary achieved. Even if the Chinese distributor had wanted sole ownership of the software rights, such a concession from the US company would have been highly unlikely.

Consultants with ulterior motives represent a further hazard. In one case, an Austrian company that was interested in manufacturing furniture in China contacted a China-based Austrian entrepreneur. The entrepreneur had a factory in a small, isolated village in northeast China. The company requested a feasibility study on the location of its own facility. To its surprise, the report concluded that the perfect location for the assembly facility was the town in which the entrepreneur's factory was located, despite its poor transport links and distance from raw materials. The consultant had pinpointed a factory on a street near his own factory; moreover, he claimed that that he had secured the local party secretary's valuable support in its use. The consultant was also willing to take a share in the new venture to ensure that it went smoothly. The company established an assembly plant elsewhere and has been in business successfully for several years without the kind of political support that the consultant had offered.

Translators
Many business primers on China rightly emphasise the importance of using independent translators. A translator wields significant influence over negotiations with a Chinese counterpart. Some foreign investors like the idea of an interpreter who takes a negotiator's words and turns them into acceptably polite Chinese wording. For most investors, this is a poor solution. If a direct manner leads to irreparable trouble with a Chinese counterpart, the two parties were probably not destined to do business.

A foreign company negotiating a joint venture is likely to need an independent translator at meetings with the Chinese partner. In many cases, the foreign partner relies on its Chinese manager to fulfil the role, but this arrangements often works badly. The Chinese manager is typically keen to see the transaction proceed and may tend to soften wording or provide explanations that are either unnecessary or incorrect. A manager in this position is rarely able to regard a project's abandonment as being in the company's best interest. However, many investors have found to their cost that it would have been better to abandon a project than to embark on an enterprise in which the partners have been misled in respect of the overall strategy. If the project proceeds, the shareholders often need to have a direct discussion without the presence of local management. Direct confrontation is avoided in China even more than elsewhere. Therefore, if the person translating is part of the problem, this will affect the way in which the Chinese partner seeks to raise its issues.

Accountants
Accountants are involved in almost every foreign-invested enterprise project and the broad scope of their work in China can be surprising, as they often take a role in:

• selecting the investment location;
• advising on tax rates;
• negotiating tax subsidies;
• auditing and conducting financial due diligence; and
• providing ongoing advice on issues such as:
  • transfer pricing;
  • customs duties and value-added tax planning;
  • foreign exchange issues;
  • tax incentives; and
  • Chinese and foreign tax returns.

The 'big four' accountancy firms are well represented in China, with offices in the major cities. Accounting firms normally provide services such as:

• audit and assurance;
• investment strategies;
• forensic services;
• risk management solutions;
• human resources services;
• initial public offering services;
• M&A support;
• tax services; and
• transaction services.

Lawyers
Lawyers' services may overlap with those of consultants and accountants. In Chinese M&A deals, lawyers typically:

• conduct legal due diligence on the target and its assets;
• structure the transaction;
• draft contracts;
• assist in the negotiation of the transaction documentation (eg, the joint venture contract, asset transfer agreement and articles of association);
• accompany the project's approval process; and
• provide ongoing support.

Business teams must manage lawyers properly within a deal. Many lawyers wish to restrict themselves to providing narrow, purely legal advice. However, in transactions in China much of the lawyer's value comes from experience gained in other transactions. In addition to legal advice, the lawyer should be prepared to provide the client with an independent and contextualised assessment of the transaction risks.

Comment

Assembling a transaction team is a key factor in completing a successful project. If the in-house team has high-level support from within its company, it has a far greater chance of success and the project will proceed more quickly.

In most cases, an in-house team needs external support. Selecting and managing external consultants is crucial. Ideally, the external team should provide practical insights on how best to overcome issues and minimise risk.

For further information on this topic please contact Mark Schaub at King & Wood by telephone (+86 21 2412 6000), fax (+86 21 2412 6150) or email (schaub@kingandwood.com).

Endnotes

(1) Graham and Lam, "The Chinese Negotiation", in Harvard Business Review on Doing Business in China.

(2) Id.