Chinese Counsel Crucial To Cross-Border M&A

Monday, December 6, 2010 - 01:00
Jincheng Tongda & Neal (JT&N)
Lan Lan

Lan Lan

Editor: Please tell us about your background and practice areas.

Lan: I was born in Beijing. After studying at Cambridge, I worked for the Chinese government for four years. I graduated from Harvard Law in 1994 and joined Skadden, Arps, Slate, Meagher & Flom in New York. In 1998, I moved to John Hancock Life Insurance Co. and became their chief representative in Beijing and, in 2000, helped to launch the operations of John Hancock's life insurance joint venture in Shanghai. A few years later, I received my PRC license and started building a PRC law practice tailored to multinational companies coming to China. In 2008, I merged my practice with JT&N. JT&N is a top ten, full-service Chinese law firm with over 300 lawyers. I specialize in mergers and acquisitions as well as corporate compliance for multinational financial service companies in China.

Editor: I understand that you have been involved in a number of significant transactions.

Lan: Yes. Primarily, we advise multi-national companies with respect to China acquisitions or global acquisitions with Chinese elements. I focus on inbound, but we have partners who cover outbound investments as well.

Editor: How has Chinese law evolved into a separate legal body and system?

Lan: Thirty years ago, the "Equity Joint Venture Law" was the only Chinese commercial law, requiring fewer than two pages to enumerate. By contrast, in 2009, the China Insurance Regulatory Commission alone issued approximately 200 rules. Chinese law has also developed distinct features and complex contents that require systematic and in-depth study as well as continuous immersion in order to practice competently. For example, there are multiple sources of authorities under the Chinese legal system: legislations, regulations, and rules by the central as well as local governments. It is crucial to understand which rules prevail over others in particular situations.

In addition, 30 years ago there was pretty much one government agency in charge of all foreign investments in China. Now one investment could be subject to the approvals of four or five agencies. It is crucial to understand which government agencies have regulatory powers over you.

I cannot over-emphasize the importance of a lawyer's capability to communicate with the regulatory agencies, because statutes in China are usually broad and vague and therefore very much subject to the interpretations of the administrators. Communications with the regulators is crucial in PRC law practice.

Editor: Do you find Chinese law quite different from what you encountered in the U.S.?

Lan: Broadly speaking, it is similar in the sense that government policies affect implementation of the rules and laws. In the U.S., for example, review of foreign investments sometimes is colored by national sentiment or government policies. In China, this phenomenon is magnified.

In my opinion, there are no experts in both PRC and U.S. law. Thirty years ago, you could set up a joint venture based on research amounting to a one-page document. Now, unless you are well versed in PRC law and maintain constant communication with regulatory agencies, you will almost surely make mistakes. Chinese law evolves very fast.

Editor: What are some of the policies and politics in China that present the greatest challenges to your practice?

Lan: Overall, the rules make sense, but enforcement is inconsistent and oftentimes lags behind. This is true with respect to IP, but there are other areas in which this statement applies. While the rule may state that an administrative agency must reach a decision within 20 working days, they are rarely on time. What is written on paper may be different from reality, and this creates a lot of frustration.

Editor: What are the unique issues in advising U.S. companies on China's M&A laws?

Lan: Mergers and acquisitions in China and the U.S. are similar. The purchase agreement is always a key document, and antitrust issues must be addressed. But the details differ. For a China deal, the contents of representations, warranties and conditions precedent to closing are significantly different from an American deal. Chinese deals are subject to more government approvals, which, in turn, affect the structure of the deal.

Editor: How are these differences reflected in the structure of the deal?

Lan: For example, in China, a purchase agreement is often not binding without government agency approval. Relying solely on the purchase agreement can lead to some very unpleasant consequences. For example, if the purchase is never consummated, what obligations remain? If there are expenses that already have been incurred, who should bear them and in what proportion? You need another agreement for these foreseeable issues, which may emerge and persist even if the deal falls through.

Editor: Is it safe to say that a firm like JT&N has unique insights with respect to government agency requirements, enabling you to facilitate approval at the national and local level?

Lan: Yes, and this illustrates the need for Chinese counsel to be engaged, right from the start. From central and local agencies to antitrust and foreign investment review agencies, you need to know the specific approvals to which the deal is subject.

A good example is the purchase of equity from a local Chinese company. Without appropriate government approval, the deal can be reversed after the fact, resulting in lost funds and an invalidated or defective title. It is very important to understand the legal requirements right from the start and not rely on the seller to give objective and accurate information.

Editor: Can you give us an idea of how long this process takes?

Lan: That depends on the deal structure, the industry involved and your counterparts. Government scrutiny is tighter with a state-owned company and the approval process takes longer. With private equity and assets, the approval process is relatively more streamlined.

Editor: Are agency officials proficient and likely to move as quickly to facilitate a transaction?

Lan: It depends on the agency's experience, manpower and culture. I worked with some regulatory agencies in the U.S., and I would say that generally speaking China's bureaucracies lag behind their U.S counterparts, but not as much as people would imagine.

Editor: Does this emphasize the need to retain a firm that handles many transactions and is constantly working with the regulatory agencies?

Lan: Yes. No one can credibly claim to be an expert in PRC law as a whole. Each lawyer needs to specialize in one or two areas of the law in order to be competent. For a complex transaction that involves multiple areas of the law, you need a full service law firm that has experts in each of the relevant areas.

Editor: With respect to cross-border transactions, why is it important for local counsel to be engaged from the start?

Lan: We often are consulted at the last minute because international counsel did not explain clearly what is at stake - only to find that the structure was faulty from the start. After multiple rounds of negotiations and on the verge of closing, we must tell them that the deal was not designed properly and/or additional approvals and/or additional documents are required. By then, it tends to be too late and deals tend to fall apart under the weight of such bad news.

If we are involved from the beginning, we can design a deal that includes all required elements and excludes what we reliably determine is unnecessary. Making informed decisions about acceptable levels of risk is part of the structuring of the deal.

Editor: What are the key factors for successful China M&A deals?

Lan: The most crucial factors are obtaining government approvals, negotiating effectively and identifying acceptable risk parameters. Pricing, due diligence, etc. are common to all deals. The most distinguishing factor with China is navigating the governmental approval process.

Editor: What role does China's anti-monopoly law play in closings?

Lan: The law states that if a deal does not complete required antitrust reviews, it can be reversed. Counsel must determine: (a) if a deal is subject to antitrust review; and (b) what constitutes completion of the process. Some deals were struck down by the antitrust regulatory body, but, so far, most have passed. We handled one of the first applications and our deal was cleared.

Editor: Does China's new labor law present specific compliance issues?

Lan: China's labor law is quite strict, and not all companies are in compliance. If you buy a non-compliant company, there is a risk that labor issues would arise post-closing. Identifying and quantifying this liability is a common and critical due diligence issue.

Editor: Please discuss due diligence with respect to China's new anti-corruption laws, both within China and concerning U.S. counterparty compliance with the FCPA.

Lan: While the Chinese anti-corruption law is not new, enforcement is rising. Due diligence plays a key role in protecting a client from acquiring a company that later is sued for corruption. Such action can result in fines and a tainted reputation both inside and outside China. As with the FCPA, Chinese individuals will not face criminal charges for corrupt acts under FCPA, but FCPA investigations may trigger Chinese government's investigations, which may lead to criminal charges against both Chinese and foreign individuals under the PRC anti-corruption law.

Editor: Are there other important areas of compliance to which companies should be sensitive?

Lan: For financial service companies, complying with industry-specific laws, regulations and rules is a major component of their daily compliance work. For all foreign companies in China, regardless of their industries, foreign investment rules, corporate registration rules, foreign currency rules, anti-unfair trade practice, anti-corruption laws as well as labor laws and rules constitute areas to which they all should be sensitive. This is by no means an exhaustive list. For example, money laundering and tax are another two areas international companies need to monitor closely.

Editor: How important is it to have experience in U.S. law when the deal involves an American company?

Lan: For deals involving multiple jurisdictions, U.S. law background is very important, and the FCPA is a good example. A Chinese lawyer without any U.S. law exposure may not understand that a local company cannot entertain officers from state-owned companies, whom the local company views as their business partners but the FCPA considers to be foreign officials. We at JT&N can easily spot these issues because most of our partners involved in international practice have had U.S. law background or exposure to the legal practice in the other western countries. Actually, most of the top ten Chinese law firms are similar in this respect.

I must say, foreign law firms also play an important role in China-related deals. While they are specifically prohibited from practicing Chinese law, their strength lies in their understanding of the laws of the home jurisdiction where the cross-border transaction is originated. In all major U.S.-China transactions, there should always be both qualified U.S. and Chinese attorneys involved, although the degree of involvement varies depending on the specific issues and any given stage of the deal.

I know of no single lawyer who can claim expertise in the laws of both countries. Effective counsel must be immersed in local law in order to stay current, and foreign firms usually cannot communicate with government agencies unless local counsel is involved.

Editor: Do you have any closing remarks for our readers and viewers?

Lan: In closing, I would like to say that corporate counsel is ill-served by generalists claiming to know everything about U.S. and PRC law. There are no such experts in my experience; therefore, it is critical to select a specialized lawyer who has experience with the specific deal you are contemplating.

Please email the interviewee at with questions about this interview.