South Africa: Chinese-African Cooperation: The Devil Is In The Detail

Last Updated: 11 May 2016
Article by Kenny Chiu and Wendy Shih

Most Read Contributor in South Africa, September 2016

At the opening ceremony of the Forum on China-Africa Cooperation ("FOCAC") summit held in Johannesburg in December 2015, the President of the People's Republic of China, Xi Jinping, announced that China intends to invest US$60-billion in Africa over the next three years. This undoubtedly reaffirms the commitment by China and Africa to bilateral cooperation, thereby furthering China's " One Belt, One Road" foreign policy. However, before celebrating prematurely, it is important to consider how Africa and China can mutually benefit through bilateral cooperation, while being cognisant that a win-win outcome will not be achieved overnight.

When China became the world's second largest economy, ambitious Chinese companies pledged to expand their target markets abroad by extending China's businesses and technology and to work with other countries to help change the world for the better. To this end, China chose Africa as its testing ground and, as such, an increasing number of merger and acquisition transactions involving Chinese companies is taking place in Africa.

However, this expansion into Africa has not been easy for Chinese companies, which still face a number of challenges. These include differences in language, culture, belief systems, social psychology and organisational structures. In addition, cooperation with Chinese companies in Africa may be influenced by politics, sometimes at the expense of certain economic interests and with a resultant disregard for the importance of the law.

African companies are often very stringent when it comes to legal compliance (particularly in respect of joint ventures). Chinese companies, by contrast, may have limited knowledge of local laws and/or lack of experience when it comes to transacting abroad. This can become problematic in merger and acquisition transactions, in which it is often the company's top decision-makers that act as the transaction leaders and who may limit their focus to the key commercial issues of the partnership arrangement, without giving much consideration to potential disputes or conflicts that may arise. This approach often results in a breakdown of the relationship between the two parties, who then have to resolve the dispute by means of litigation. This can incur severe losses, which could have been avoided with the right consultation.

Some Chinese companies have also learned the hard way that blindly making use of existing contract templates in multiple African jurisdictions without considering local laws or making amendments to cater for the specific circumstances may save costs on advisors in the short term, but not in the long term.

Chinese (and foreign) companies doing business with African companies should pay particular attention to the legal differences in various African jurisdictions to ensure that they understand local laws (as well as international law) in greater detail. In this regard, legal talent with international experience should be hired and transparency should be prioritised when settling partnership arrangements.

Unfortunately, some Chinese companies expanding abroad have learned their lesson the hard way, often having to suffer great financial loss in order to overcome obstacles. In the era of globalisation, business can no longer be conducted while ignoring the importance and impact of local law. Also, it should not be assumed that because Africa is developing, its legal systems are not as sophisticated as those in developed nations. It can be argued that the laws of various parts of Africa are more stringent, technical and practical compared to the laws of China. Most African companies have a profound knowledge of the law and highly value and respect it. Therefore, it is recommended that Chinese companies involved in merger and acquisition transactions and/or partnership arrangements with African companies should pay particular attention to agreement details and scrutinise each aspect from a legal perspective. By doing so, a fair and mutually beneficial result can be achieved for both parties.

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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