Inter-Pacific Bar Offers China Strategies, Stories

Hundreds of lawyer from all over the world descended on Century City this week in the city’s first Inter-Pacific Bar Association meeting to be held in L.A. 

One of the prominent topics in the Asian-law focused event was a discussion of M&A strategies in China, an area of law experiencing much change and uncertainty. 

Foreign investors — such as private equity and hedge funds— are still trying to figure out “the route to liquidity” in China, said Michael Gisser, a Skadden Arps attorney.

Much of the discussion centered around the types of M&A available to foreign investors, especially in light of 2006 government rules that dramatically changed the landscape there — including making it more difficult for domestic companies to use offshore vehicles to list overseas, the "red chip listings."

Michael De Sombre, Sullivan & Cromwell attorney in Hong Kong, explored new possibilities for M&A in China such as reiterations of the joint venture and “the Internet model,” a “dicey area” in which foreign investors don’t actually own onshore assets, but economic benefits are transferred.

In the discussion, De Sombre also relayed a great anecdote about due diligence in China.

A client was trying to acquire a company in the Internet space. They noticed a lengthy list of “miscellaneous expenditures.”  It turns out the license was acquired via house shopping with a regulator — basically asking the regulator “What type of house do you want?” in exchange for a license.

“You really do find amazing things.” De Sombre said.

Relationships really come in handy when you’re doing due diligence in China, said Mark Mihanovic from McDermott Will & Emery.

“It’s critical that trust be built with the Chinese players providing the information,” he said. “Do everything you can to encourage the free flow of information.”

He stressed the importance of assembling a strong diligence team with good Chinese attorneys, investment bankers, and a coordinator of the effort — a team that will research key legal issues in China companies, such as agreements with the founders that might alter the course of the transaction.

There are often long gaps between singing and closing — time to look at the information even more.

“Hopefully there will be no big surprises, but that’s not always the case,” Milhanovic said.

When it comes down to it, all of the changing landscapes and uncertain terrain make for some pretty exciting legal work, said attorney James Zukin, from Houlihan Lokey Howard & Zukin.

“Lawyers play bigger, broader, and more value-added roles in China than in the United States,” he said. “The system is still changing.”

—  Kellie Schmitt