China: China M&A: Assembling an Effective Team for a China Transaction Part III

Last Updated: 6 September 2010
Article by Mark Schaub
This article is part of a series: Click China M&A: Assembling an Effective Team for a China Transaction Part II for the previous article.

Most companies engaging in a China project will likely need support from external consultants. This final section highlights the remaining members of the China deal team, including translators, accountants, and outside counsel.

Translators

"Mr. Zhang, you are a crook. You have misappropriated Joint Venture funds. I demand that you return the funds immediately." — Irate China Investor

Translation by China interpreter (Translation as follows: Esteemed Mr. Zhang: Our foreign guest is unclear of Chinese accounting practices. He understands that there may have been certain inter-company loans between your esteemed company and the Joint Venture. Our foreign guest would appreciate if your esteemed company would at its earliest convenience return such funds to the Joint Venture.)

Many business primers in China lay great emphasis upon the use of independent translators. However, many others continue to believe it is not necessary. They are wrong.

With very few exceptions, the Chinese side will indeed need a translator even if the person with whom you are talking can speak English (or if you assume he speaks English).

I am reminded in such regard of the Belgian businessman who had conducted a number of meetings with a Chinese customer. The Chinese customer spoke some English himself and had his daughter acted as a translator as she had studied English at high school. The Belgian businessman was delighted about how quickly the Chinese customer had understood everything and his intense concentration. The Belgian would often speak for 20 minutes without interruption. At the end, the Chinese customer would simply agree. Curiously, most questions raised were on very simple issues or words. This was in fact not surprising as the Chinese customer probably understood virtually nothing, and his daughter may have only understood some of the opening statements.

There are no if's or but's — it is crucial to have your own translator in China.

However, that is not the end of it. As illustrated in the opening quote of this section, the translator wields enormous influence over the negotiations with the Chinese counterpart. Some foreign investors like the idea of a sherpa-like interpreter. This is someone who will take your words and then turn them into "acceptable polite Chinese wording". For most investors, this is a poor solution. Most Chinese business people with whom you will meet can take it straight. I suggest only to use an interpreter if you believe the person: (1) is a better negotiator than you; (2) is clearer about your objectives than you are; and (3) has a better understanding of your company than you do. If not, it is better to use a translator. And if your direct manner does get you in trouble with the Chinese counterpart, well, it is likely that you are not destined to do business with one another.

It is also worth emphasising the word "independent". If you are in a joint venture, it is probably important to have an independent translator at meetings with the Chinese partner.

In many cases, the foreign partner relies upon his Chinese manager to fulfil this role. In my experience, this will often lead to extremely negative results. Firstly, the Chinese manager is typically very keen to see a transaction occur. For this reason, the Chinese manager will often soften wording or provide explanations to a potential Chinese partner who you may deem unnecessary, or worse still, wrong. This does not mean that such behaviour is an act of bad faith, but he can often believe that his behaviour is in the best interests of the project. In very few cases does the China manager see a project dying as being in the company's best interests. However, experience has shown time and again that it would have been best to put a project to sleep rather than embark on an enterprise in which the partners have been misled to the overall strategy. Further, if a project does go ahead, it is often important for the shareholders to be able to have a direct discussion without the presence of local management. Direct confrontation is avoided in China even more than in the West. Therefore, having a person translating who may be part of the problem will at the very least affect the way in which the Chinese partner may wish to raise problems. (In some circumstances, the translation might twist the meaning of the original message. For example, when one tries to translate to his boss that the other side says "the General Manager is an incompetent fool", he might have to translate it as: "They think the General Manager needs more support to improve the overall condition of the company")

Accountants

"Can't live with them, can't live without them." — China project manager on accountants

Accountants are involved in almost every FIE project. Their scope of work in China will often surprise many. They are often involved in the selection of investment location, advising on tax rates, negotiation of tax subsidies, audit, financial due diligence, and ongoing advice on issues such as transfer pricing, customs duties and VAT planning, foreign exchange issues, tax incentives, and China and overseas tax returns, etc.

The Big Four accounting firms are all very well represented in China with offices in the major cities. In addition to the Big Four, there are also a number of smaller foreign accounting firms and local Chinese accounting firms.

Accounting firms normally provide services such as:

  • audit and assurance;
  • investment strategies;
  • forensic services;
  • risk management solutions;
  • HR services;
  • IPO services;
  • mergers and acquisitions support;
  • tax services; and
  • transaction services.

Although it will be difficult to avoid accountants, it is important to find talented ones. It can be a mistake to leave them entirely to their own devices. Often, junior personnel will be assigned to work on the project, or in some cases, the accountants will only view documents to the exclusion of physical evidence or even common sense. This can be illustrated by the case of the USD 100,000 Ford Escort.

Case study: The USD 100,000 15-year-old Ford Escort

The client had purchased the entire business and assets of a Chinese target. At closing it was necessary to complete the stock take. During the stock take, it became clear that a vehicle which was in the books for USD 100,000 was not a large, expensive, new Mercedes truck but rather a small, old Ford Escort.

The client had not conducted a physical stock take of the assets but had rather relied on the accountant's financial due diligence, which in turn relied upon the books of the company. Accordingly, no one had looked at the physical assets. The Ford Escort had entered the books as a payment for a debt of USD 100,000, ie the target's customer did not pay and the company took his car.

The business development manager of the foreign company was now in a dilemma. It was a multi-million dollar deal, and in the scheme of things, the USD 100,000 was a relatively small amount. However, headquarters (as headquarters are prone to be) would love to unravel a whole transaction based on a minor asset. The headquarters would be unlikely to know whether a plant in China is worth USD 1 million or 10 million, however, anyone would know that a 15-year-old Ford Escort is not worth USD 100,000. To add insult to injury, when the client notified the accountant of the problem, the accountant advised that it could indeed be a problem and recommended that they conduct a second financial due diligence on this issue — seemingly oblivious to the fact that they had done a first due diligence and that the case was at the stage of closing.

Lawyers

"Lawyers are like rhinoceroses: thick skinned, short-sighted, and always ready to charge." — David Mellor

Corporate lawyers are basically consultants. However, it is wise to never refer to a corporate lawyer as a consultant unless you wish to irritate him. If a consultant tells the corporate lawyer that he is a consultant "just like you", it is likely that the corporate lawyer's face will contort into a pained look similar to that of a policeman being told by a prison guard that they are both in "law enforcement".

In many cases the services of lawyers can overlap with those of consultants and accountants.

The services lawyers typically provide in China M&A deals include:

  • conduct legal due diligence of the target company and/or assets;
  • structuring the transaction;
  • drafting contracts;
  • assisting in negotiations of the transaction documentation (joint venture contract, assets transfer agreement, articles of association, etc);
  • accompanying the project's approval process; and
  • providing ongoing support.

It is important for the business teams to properly manage lawyers within a deal. Many lawyers wish to restrict themselves to providing narrow, pure legal advice. In China transactions much of the lawyer's value should be experience gained in other transactions. In addition to legal advice it is important for the lawyer to provide the client with an independent assessment of the transactions risks and the context of such risks.

Summary

China projects do not run themselves. The assembling of a transaction team is a key factor in completing a successful project. Experience has shown that if the in-house team has high level support from within their company then they will have a far better chance of success and the project will be able to proceed much more quickly.

The in-house team will in most cases need external support. Selecting and managing the external consultants is extremely important for the project's success. Ideally the external team should provide practical insights as to how best to overcome issues and minimize risk in the project.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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This article is part of a series: Click China M&A: Assembling an Effective Team for a China Transaction Part II for the previous article.
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