China - Law Firms Wall Street Comes To Shanghai

Thursday, December 1, 2005 - 01:00

Editor: Please tell our readers about your background. How did you come to know Weil Gotshal?

Xiang: After finishing college in Beijing, I moved to California in 1985 to complete my graduate studies. I worked for two years as a journalist in San Diego, and then attended Vanderbilt University Law School. After graduation, I began my practice in New York with the firm that became Pillsbury Winthrop Shaw Pitman. During that time I was sent to Winthrop's Hong Kong office and ultimately became the partner in charge of that office.

I moved to Clifford Chance in 2002, and was there for about three years as one of the two partners who ran the Shanghai office of the firm. In 2004, I helped Weil Gotshal to establish its Shanghai office.

Editor: Are you able to practice in PRC courts?

Xiang: I am qualified in both New York and Hong Kong but I do not hold myself out as a Hong Kong lawyer because I do not practice in that jurisdiction.

International firms are not allowed to practice Chinese law, which generally means that we cannot issue a formal Chinese legal opinion or appear in Chinese courts as counsel. We are allowed to appear in arbitration proceedings or serve as an arbitrator. On the Chinese law side, we can give advice on the "impact of the Chinese legal environment" on a transaction. We may issue a memo to our clients on the impact of the Chinese law with respect to a transaction but that memo cannot be considered a Chinese legal opinion.

Editor: Why did Weil Gotshal decide to open an office in China, and specifically in Shanghai?

Xiang: On the macro level, the country has become increasingly important on the global stage. The transactions here are growing in scale and in number. I came back to Asia in 1996 and spent six years in Hong Kong. Five years ago if you were looking to open an office in Shanghai, I would have questioned that strategy. Most of the deals at the time were taking place in other Asian locations. Now many multinational corporations, investment funds and banks are moving their operations to China, particularly Shanghai.

As a firm, Weil Gotshal has been expanding impressively in Europe in the last ten years. We have built up leading practices in various financial centers in that continent, so Asia is the next step in our global strategy.

Editor: Please describe your staff and their backgrounds.

Xiang: The Shanghai office has 15 lawyers. Bill Sievers and I are partners; we have one counsel and the rest are associates. The majority of our attorneys are New York or U.K. qualified with international experience. Some of them have backgrounds similar to mine and others are American lawyers who can speak Mandarin.

Editor: What are the key practice areas of the office?

Xiang: Our practice areas mirror Weil Gotshal's strength worldwide. About thirty to forty percent of our transactions are for clients that Weil Gotshal has represented elsewhere those investing or operating in China. The majority of our clients are multinational corporations. The balance are local clients. For example, we represent Lenovo and other Chinese companies that are expanding internationally.

The largest practice area for our China practice is cross border M&A. For instance, we are working on one of the largest M&A transactions taking place in China this year. We are also representing clients in auction sales with multiple bidders of assets in China. A transaction of this nature requires negotiations that include many aspects of an international M&A deal, such as purchase agreements, intellectual property and transitional arrangements.

The second major component of our practice is private equity - from fund formations to fund executions. We represent investment funds that are investing in different industries. We also represent companies that are raising financing. We are currently working on two China-specific fund formation projects. The investors are both Chinese and international investors. In the past, most of these investments were venture investments that focused on the technology sector in China. In recent years, larger private equity investors started to enter China. Financial services, consumer oriented companies, and strong manufacturing enterprises are now the primary targets for strategic investors and private equity funds. I expect activities in these areas to continue to grow rapidly in the coming years.

The third component of our practice is in the capital markets area. Our practice includes both debt and equity offerings. For instance, we represented the issuer in one of the largest high-yield placements of this year.

The fourth area of our practice is a growing area - our intellectual property practice. Since the laws and regulations are changing in this area, our clients, which are primarily multinationals, are looking to review their IP strategies in China. Some of them have tied up arrangements with Chinese partners with respect to research and development because a lot of R&D are being shifted to China. This practice complements our global strength in IP.

Editor: What about the high tech and biotech areas?

Xiang: In many cities, the government has opened high tech zones that give incentives to startups, including tax and other incentives. A lot of investment funds have done well in investing in startups in the last few years. We represent clients who are active in these areas.

Editor: I understand that you counseled Lenovo in their acquisition of IBM's Global PC Business. Describe that transaction - the numerous approvals required, the time involved, other regulatory hurdles, the capital structure.

Xiang: We represent clients such as Lenovo which want to expand or acquire businesses internationally, and we also represent those who want to sell to international buyers.

The regulatory environment in China for this type of transaction is complex. The transaction was further complicated by the fact that Lenovo is partly owned by a government institution, the Chinese Academy of Sciences, which is a state-owned body. Lenovo Group Limited is listed and incorporated in Hong Kong, and is one of the blue chip companies on that stock exchange. The company has a presence in both Hong Kong and China, making for a very complex transaction. We had to navigate through Chinese regulatory approvals and the Hong Kong stock exchange process.

As the largest acquisition to date by a Chinese company of assets held by a U.S. company, the deal was a pleasant surprise because it demonstrated how the Chinese government stayed on the sidelines to allow the business people to make the decisions. When the deal was signed, the company sent in the necessary applications for government approvals, including an antitrust filing.

For many Chinese companies such as Lenovo, they have less experience with such large transactions compared to their U.S. counterparts, and realize they need good advice. That is why it is important to have an international firm with people on the ground who speak the language and have their trust.

Editor: What was the size of that transaction?

Xiang: It was $1.25 billion plus certain assumed debt.

Editor: Another major transaction was the sale of Lenovo's IT service business to AsiaInfo Holding. Perhaps, you would like to describe the parties and the nature of this transaction.

Xiang: Although a relatively small transaction, it was no less complex. It was an all-stock transaction in exchange for a line of business. Lenovo is a Hong Kong incorporated company and listed in Hong Kong with almost all of its business in China. AsiaInfo is a Delaware company listed on Nasdaq with almost all of its business in China. You need U.S. securities and cross-border M&A skills because it involves different jurisdictions and Nasdaq stocks; you need Chinese regulatory expertise because you move assets and employees in China; you need employment and employee benefit expertise because employee incentive plans involving listed stock were part of the transaction. The transaction involves three jurisdictions: Hong Kong, U.S. and China, and reflects the increasing complexity of Chinese M&A work.

Editor: To what extent is there certainty with respect to transactions guaranteed in China?

Xiang: The legal environment in China continues to improve, particularly on the legislative side. For example, the new M&A regulation which went into effect in 2003 was one important reason for the increase in M&A activities. However, we still have serious issues with respect to enforcement. The quality of the court system and the decisions still vary significantly depending on different locations. As a result, arbitration is still the preferred choice for dispute resolution for multinationals because it is perceived to be more adept at dealing with issues involving foreign parties.

In business transactions in China, the importance of written contracts is now widely recognized. In the past, I have seen a U.S. $200 million deal documented by a two-page contract. Chinese companies have since become more sophisticated. For multinationals, it is essential to have contracts that are thoroughly thought through and well drafted because, as I often advise my clients, a good contract may not give you 100 percent protection in China, a bad one will guarantee you have none.

Editor: How do you plan to expand the office? Do you see extensive growth potential in China?

Xiang: After opening for a year and half, our office is running out of space. We are looking to expand. I continue to think that there are a lot of opportunities here. It is only the beginning of the trend for major, complex transactions in China or involving Chinese companies. We are pursuing a focused strategy - in the areas of M&A, private equity, capital markets and IP.

To grow our practice, we need more good people to add to the strong team that we already have. We prefer to hire lawyers who are committed to Asia and already have some international practice experience in the U.S. or elsewhere.

Please email the interviewee at steve.xiang@weil.com with questions about this interview.