Post by Sandy Swartzberg
In the United States, it is sometimes easy to forget how complex our legal system is . . . at least from the perspective of other countries. During my years of practice, I have had many lawyers from abroad intern at my firm. Whether they were French, German or even English, they all had the same comment: “America, as far as its legal system, is basically fifty countries with a common foreign policy.”
And from the outside looking in, China is no exception. There are a number of Chinese investors looking to make inroads here and are blocked by simple misunderstandings of how the United States works and how to successfully invest.
They are bewildered, for example, by the fact that different states have different laws and, therefore, your contracts need to stay with the state which the law applies. They are baffled that in some states non-competition clauses are favored, and in some they are illegal. If the transaction involves real estate, then you have to deal with several layers of government including, but not limited to, county government, municipal government, and the Department of Natural Resources.
I have seen many Chinese investors decide not to address a number of issues such as zoning, building violations, occupancy permits and water regulation, assuming they can be taken care of after closing. One example: a Chinese investor who wanted to buy an American factory with the intent to immediately add on to the property. He was astounded to find out part of the property was dedicated to drainage and, therefore, he could not build on the property. He also was frustrated when he wanted to add a plating process to the item manufactured there, only to find out there are DNR rules about how you dispose of the waste from plating and air quality rules from the Environmental Protection Agency.
I want to be clear that all of these problems are usually surmountable, if you take the proper precaution prior to sale. For instance, if you need a zoning change, the current owner can apply for that zoning change before you actually purchase the property. Unfortunately, even American investors do not understand that 99% of the time. It is far better to get permission in advance than beg for forgiveness afterwards.
The next mistake is not completing the transaction in its most favorable light. Americans, like the Chinese, are very patriotic people. Many Americans are suspicious of overseas investors buying American businesses. If that business involves natural resources, the proper presentation is everything. Frequently I have seen the Chinese investor hire a public relations firm and/or lawyer to fix an image problem after the transaction has been framed in a negative way. In one case, because of the way the transaction was framed, local authorities were already on record that they were going to block the transaction.
A related mistake: not understanding American politics. It is very hard for the Chinese investor to understand there are two political parties in the United States, and often a person from the wrong political party cannot help you.
Even when dealing with employees, it is entirely different. When purchasing a company, the purchaser needs to make sure the key employees stay with the company at least during the period of transition. I have seen several cases where even American investors have failed to recognize who are the key employees that need to stay on after the transaction. The problem is much greater for a Chinese investor.
One more thing that I think adds to the chances of the transaction being successful is hiring a lawyer who is familiar with the differences in negotiating styles between Americans and Chinese, and can explain to the American seller and/or broker how the Chinese prefer to negotiate, and also explain to the Chinese investor how Americans typically negotiate. This is a cultural difference and all too often I have seen transactions not take place because this gap was not bridged.