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The Role and Advantages of Legal Services Provided by Chinese Law Firms for Chinese Enterprises in Overseas Investments
2011年8月29日 12:23:41

The Role and Advantages of Legal Services Provided by Chinese Law Firms for Chinese Enterprises in Overseas Investments

 

 

Foreign investment is divided into four stages. First, there is no foreign investment at all as a result of a closed economy; second, a country tries to attract foreign investment to obtain foreign capital, advanced technology and advanced management experience; third, as a country continues to attract foreign capital, domestic enterprises begin to invest overseas to a greater extent, both directly and indirectly; fourth , a country takes a leading role in the global economy due to its now ample capital and advanced technology. Thus by the fourth stage, the country exerts great influence on the world economy by exporting its capital, technology and culture. China is now in the third stage.

Foreign investment by Chinese enterprises or of Chinese capital can be carried out in several ways. Initially during the policy of reform and openness, or perhaps even before this policy had been introduced, foreign investment mainly focused on overseas engineering projects and the output of labour. These conventional areas brought a much-needed reserve of foreign capital to China. As Chinas economy has become stronger, enterprises have started focusing on investments in mineral fields and resources; for example, in the last ten years domestic enterprises have undertaken such acquisition projects in Southeast Asia, Central Asia, Australia, South America and Africa. These investments provide materials and resources which are necessary for national economic development. More recently, in addition to the development and improvement of the technology in some fields, China has also gradually acquired a leading position in other fields, now possessing the ability to invest and export technology and industry to foreign countries, including investments in electricity, roads, bridges, transportation and railways. The development of technology and growth of the domestic market also highlight foreign investment of enterprises in the fields of technology and capital. In addition to the restructuring of industries and the economy in China, light manufacturers have also set up factories in their host country, in order to reduce costs and maintain market proximity.

Within the foreign investment process of Chinese enterprises, we shall focus on the study of the role or function of native lawyers or native legal services.

 

I.        The demand from Chinese enterprises for legal services to invest overseas

1.        Previous legal due diligence

Previous legal due diligence includes:iinvestigating the legal environment of foreign countries to evaluate the degree of legal risk for Chinese investors; andiiinvestigating the laws applicable to the specific investment projects and content of transactions. Initial legal due diligence should be based on comprehensive discussion and research by a team including both native and foreign lawyers; this team should also provide the Chinese investors with a report, which must meet the requirements of the enterprises specific projects. The enterprises will take this report into account when making investment decisions. Additional factors need to be taken into account for some projects, such as those concerning electricity or infrastructure, including the political and economic environment of the state and its financial data.

 

2.        Legal services throughout the process of foreign investment projects

Legal services are involved throughout the entire process of foreign investment projects; these services include, amongst other things, the design of the trading scheme, the drafting and examination of the transaction files involved in the investment projects, internal and external discussions, commercial negotiations with the other party and assistance with the implementation of the transaction files

 The involvement of lawyers in the design of the trade scheme helps to prevent the initial risks of foreign investment projects, and further protects the interests of investors as much as possible in the relevant legal scope, providing a good and solid foundation for the draft of transaction files.

Comprehensive discussion is very important when dealing with transaction files. It is essential that customers' requirements are fully understood,  in addition to the results of the due diligence; and these need to be coordinated and integrated into the transaction documents to fully guarantee the prevention of all risks in the legal files.

In overseas investments, a team of lawyers will lead the external negotiations concerning transaction risks.  This is not only due to the professional expertise and efficiency the participation of lawyers will provide, but also so that the customers commercial needs can be met to the greatest extent possible through coordination with the business departments of foreign enterprises.

 

3.        Implementing transaction files

In overseas investments, there are generally many preconditions which must be fulfilled before the final signing of transaction files these include, for instance, the satisfaction of the requirements for the approval of the host countries and the government of China, and the conditions for financing. The team of lawyers will confirm whether these requirements are satisfied, and meanwhile provide risk prevention for the customers.

The complexity of the transaction files is renowned in current international investments. Lawyers draw them up in their entirety, which helps the enterprises to understand the reason and purposes of each term contained in the files, and aids the avoidance of risk. This assists the enterprises in implementing the transaction files with ease, especially for the projects concerning the construction of large infrastructure, and also to provide better support for customers.

 

II.     The participation of lawyers in overseas investments by Chinese enterprises

 

 It took quite some time for Chinese enterprises making overseas investments to require legal services provided by law firms.

Initially when Chinese enterprises made foreign investments, it was common that there was no legal participation in the investment process, and the enterprises relied completely on management personnel to carry out business negotiations and risk management.

When this method encountered problems, some enterprises required limited participation by lawyers at particular stages, for instance, lawyers were entrusted to provide legal risk analysis when transaction files had been basically defined, or, when transaction files had been concluded, to solve legal problems that arose in the implementation stage, as are prevalent in private enterprises.

As Chinese enterprises are becoming more and more competent in risk prevention and the law, they have fully realized the importance of lawyers. Lawyers are entrusted to participate in the entire process, from initiating overseas investments to implementing project transaction files.

 

III. Models on legal services for Chinese enterprises investing overseas

 

For Chinese enterprises investing overseas, investment projects are usually located in developing countries – particularly those in the resource, energy and infrastructure fields. However, it is often Anglo-American law and international treaties rather than the host country’s own law that is applied to the project. This article will now discuss in depth how to organize a legal service team and the qualifications required.

Currently when Chinese enterprises invest overseas, there are three models that can be followed to choose lawyers to provide legal service:

1.        the enterprise only engages a law firm located in the area where the project is situated to provide legal service;

2.        the enterprise entrusts an international law firm as the leading consultant to provide legal services jointly with local law firms;

3.        the enterprise entrusts a Chinese law firm with rich experience on overseas investments as the leading consultant along with other international law firms and local law firms, which make up a legal team to provide legal service.

 

 

No Chinese law firms participate

Chinese law firms participate in certain periods

Chinese law firms run through the whole process

Guarantee of security

low

medium

high

Efficiency of communication

low

low

high

  Effectiveness of cost

medium

high

medium

 

The following factors should be taken into consideration when choosing a team to provide legal services for the overseas investments of Chinese enterprises:

1.            Protection of the security of the macro environment for enterprises and the whole industry;

2.            Whether the team can communicate with the enterprises and other parties effectively and sufficiently;

3.            Whether their practical experience of relevant industries is rich enough to support the project work;

4.            Whether the fee is economical.

 

IV. The main advantages and job scope of Chinese law firms serving as  the leading consultant

 

First, as the leading consultant Chinese law firms can guarantee the overall economic security of enterprises. Foreign investments often involve sensitive commercial and technical information for the industry and enterprises. If confidential information relating to the state, the industry or enterprise is disclosed to the project consultant without restraint, it could result in the leak of such information, and threaten security. Since international law firms have a wide range of customers, and the competitors of Chinese enterprises are in general their most valued customers, careful consideration must be given as to how effective their internal procedures are in regulating conflicts of interest such as these.

On the contrary, Chinese enterprises have long cooperative relationships with Chinese law firms, and thus are often valued customers.. This means that there is no conflict of interests between law firms and enterprises in China. In addition, when organising work for foreign lawyers, Chinese law firms will filter any sensitive commercial and technical information out in advance. Thus, the most confidential matters of the state, the industry and the enterprises are fundamentally protected.

Second, Chinese lawyers have a good knowledge of China’s native enterprise culture and internal operating rules, and thus are able to provide customers with the most direct and effective solutions. In addition, with professional training they can effectively manage communication between Chinese enterprises and foreign lawyers, serving as a bridge both for cooperation and to reduce any inconsistencies arising from the cultural diversity.

Third, when choosing Chinese lawyers to form a team for foreign investments, Chinese enterprises are able to select those who are familiar with the operating rules of the industry,  highly experienced in investment, financing, construction, operation and management in related areas and who have experience with foreign businesses. This ensures that the legal team has both professional and legal knowledge, and in addition, the team is able to communicate effectively with all parties overseas.  As they are competent both in Chinese and the relevant foreign language, the team also ensures that all projects run smoothly, and that enterprises enjoy all the advantages legal services can provide.

Fourth, although  Model 3 appears to be less cost effective that Model 2 due to additional spending on a Chinese law firm, the actual cost is less due to the lower fees and higher work rate of law firms in China. Chinese law firms play an important role in the estimation and reduction of expenditure.

 

V.     Service provision skills which law firms in China need to obtain

   

Which internal infrastructure is it necessary to improve in order to provide Chinese enterprises with a legal service for overseas investment?

First, we need to gain long-term professional experience. The enterprises not only need lawyers who are fluent in law or Chinese law, but also who comprehend the laws and rules of the industry, including technical procedure and characteristics, and working conditions of other similar projects. Only lawyers with these qualities can provide valuable and professional legal services.

Second, we need to acquire experience on long-term overseas investments and international transactions. Experience with overseas businesses will effectively help the enterprises to discover risk factors in the process of overseas investment and provide valuable risk prevention measures. Long-term experience of overseas work will also help the enterprises to communicate with parties and provide value-added services.

Third, the team which provides legal service needs to possess professional skills and international working experience. Possessing overseas work experience or an overseas education would also be beneficial; it would help to develop overseas work, assist the enterprises to strengthen communication, narrow cultural differences with countries and districts where investment projects are located, ensure the business is appropriate to the host country, and promote the analysis and judgment of investment risks.

Fourth, a legal team needs to build up a long-term, genuine business relationship. The strength of this relationship will influence the following factors: first, to what degree enterprises trust lawyers; second, the legal team's understanding and knowledge of enterprises, and in particular, their ability to understand the practical needs of an enterprise quickly, effectively, and fully.

Fifth, a legal team needs to have the ability to communicate effectively with overseas peers.  Good linguistic skills  and a knowledge of industry and international customs may improve communication and cooperation among teams and help efficiently provide accessible services and support.

The trend of Chinese enterprises investing overseas is overwhelming. This is not due merely to the demand for such enterprises, but rather more because China’s share in the world economy and influence on the world have grown immensely. It is almost certain that, with circumstances as they are, more Chinese enterprises will invest overseas. As Chinese capital is invested in the world, it is essential that Chinese lawyers grasp the opportunity to improve competence, participate in global economic affairs, and cooperate and compete internationally on a higher arena, in order to develop their professional skills and promote the international status of Chinese industry. In order to achieve this goal, China’s legal professionals need to exercise their skills with great diligence and improve the way in which they promote themselves. Meanwhile, leading authorities and industry sectors need to assist in bringing native legal professionals to the international arena by offering more opportunities, introducing new talent, providing professional training, introducing policy support and offering platform structures. This will not only promote overseas investment by Chinese enterprises, but also improve the status of Chinese lawyers internationally.

 

 

 

王卫东

国浩律师(北京)事务所

 


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