Sense And Sensibilities: Pan-asian Cross Cultural Issues
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SENSE & SENSIBILITIES PAN-ASIAN CROSS-CULTURAL ISSUES Michael D. Lee Pamir Law Group
Ancient Chinese Wisdom Applied to 21st Century Cross-Border Venture Capital & Private Equity Transactions
知己知彼，勝乃不殆 知地知天，勝乃可全 If You Know Yourself and Know Your Adversary Victory Will Not Be in Doubt; If You Know the Land and the Skies, Victory Will Be Complete
孫子Sun Zi The Art of War Chapter 10 “Terrain” 6th Century B.C.
21st Century Translation for International Corporate Lawyers: Know Yourself (aka Your Client) Know the Opposing Party and Their Lawyer Know the Terrain (aka Local Business Culture, Regulatory Environment and Balance of Relative Comparative Advantages)
To “Know” Means to Know the Party’s (or the Regulator’s) Personal and Institutional Concerns Bargaining Position Goals for the Transaction Motivating Factors (What Makes Them “Tick”?) Decision-making Dynamics and Influences Who Has Ultimate Say What Will Bring Them to “Yes”
Common “Terrain” Issues in Asian Jurisdictions Surrounding Environment and Key Relationships More Important Than “Paperwork” Family-Owned Businesses Hierarchical Mentality/Centralized Decision-making Power Preference For Tax Haven/Tax Efficient Jurisdictions Preference For “Sticks” Over “Carrots” (Tendency to Punish Wrongdoing Rather Than to Incentivize Good Behavior) Haggling Culture
The Terrain: Surrounding Environment and Key Relationships Over “Paperwork” Deals are made when the two bosses agree, and they leave it to their underlings to handle the “paperwork” ……. Sometimes afterwards!
The Terrain:
Environment and Relationship Over “Paperwork” What This Means for Lawyers…
A Lawyer’s Worst Nightmare? An Already Signed Contract (or Bar Napkin!) No Due Diligence; No Reps & Warranties; No Outs! Lack of Government Approvals? Potential Liabilities for Directors or Mr. Bossman? Legal Documentation Viewed As A Formality Lots of Cleanup “Paperwork”
The Bright Side….. No Argument Over Principal Terms The Deal is Set and Will Close (If Not Already…..) The Client (and Other Side) Might Sign Anything You Give Them
The Terrain: Family-Owned Businesses Focus on Keeping Costs Down Shortcuts to Avoid Government Red Tape May Not Be Used to Thinking Globally or Long Term
Centralized Decision-making Power (sometimes for generations!) Larger Family Business Are Diversified, and Some Are Involved with VC and Private Equity Investments
The Terrain: Family-Owned Businesses What This Means for Lawyers… No (or Low) Legal Budget Not Used to Using Lawyers for Preventative Measures or Negotiations Lack of Sophistication or Limited Contact with Non-Local Companies Lots of Due Diligence Issues (Zoning Issues, Lack of Approvals, etc.) Accounting Issues (Is the Revenue Where They Say It Is?) The Negotiator May Not Be the Decisionmaker The Negotiator May Be A Family Member with No Business Experience (But A Lot of Influence Over Ultimate Decisions)
The Terrain: Preference for Tax Haven Jurisdictions Many Asian Jurisdictions Assess Income Tax on Local-Source Income, Hence the Preference to Use Tax Haven or Tax Efficient Jurisdictions to Incorporate or Hold Operating Companies Common Tax Haven Jurisdictions Used: British Virgin Islands Cayman Islands (especially if IPO is the goal) Samoa Bahamas Pacific Island Nations That Allow Memorandum & Articles of Association to Be in Non-English Languages
Common Tax Treaty Jurisdictions Used to Reduce Tax in Asia Mauritius Netherlands Antilles & Netherlands Labuan Ireland
The Terrain:
Preference for Tax Haven Jurisdictions What This Means for Lawyers…
Understand Client’s Goals to Properly Structure the Corporate Scheme with Local Counsel Obtain Proper Advice to Ensure that the Client Knows What to Do to Maintain (and Not Lose) its Tax Efficient Status May Need Input from Client’s Accountants Working with Local Counsel from Tax Haven/Tax Treaty Jurisdictions For VC deals, check that special VC terms, such as conversion and anti-dilution, actually work under the Companies Law of that jurisdiction
The Terrain: Hierarchy & Centralized Decision-making Power Hierarchy of Rank is Apparent in Most Asian Cultures A Person’s Rank Determines His/Her Level of Decisionmaking Ability Always Need to Ask the Boss for Decisions Outside His “Box” Underlings are Reluctant to Take Responsibility (“C My A” mentality) Regulators Cannot Approve Anything “Out of the Ordinary”
Government Bureaucracy, Bureaucracy, Bureaucracy !
The Terrain: Hierarchy & Centralized Decision-making Power What This Means for Lawyers… Addressing People By Their Titles, Rather than First Names Opposing Party’s Negotiator (or Government Regulator) Always Needs Upstairs Approval (Possible Delay Tactic) Negotiator (or Regulator) Won’t Budge on Issues (for fear of being punished for giving into demands) Negotiator (or Regulator) Sticks to “How Things Have Always Been Done” (to avoid having to explain a novel concept to the boss or to persuade the boss to accept something new) Bureaucratic Nonsense and Delays Must Know How to Grease Bureaucratic Wheels (Legally, that is!)
The Terrain: Preference for “Sticks” Over “Carrots” (Tendency to Punish Wrongdoing Rather Than to Incentivize Good Behavior) To Behave Is Expected, So Misbehavior (Naturally!) Leads to Punishment
The Terrain: Preference for “Sticks” Over “Carrots” What This Means for Lawyers… Liquidated Damages or Penalty Clauses Tangible Pressure on the Portfolio Companies from VCs Performance Milestones Super-conversion Clauses (Preferred Stock Converts to Common Stock at 1:1.X or 1:2, etc., in the event milestones are not met, rather than the standard 1:1) Use of “Full Ratchet” Anti-dilution Clauses Much More Common than in the U.S. Redemption Clauses with Time Deadlines for IPO
The Terrain: Haggling Culture
In Asia, Buyers Are Expected to Haggle. Period.
The Terrain: Haggling Culture What This Means for Lawyers…
Counsel Buyer Clients Not to Appear Too Eager “Nickel-and-Diming” and “Second and Third Bites at the Apple” are Common How Do You Let the Other Side Know that “This is the Deal. Period.”? Know When to “Go Silent.”
How Do International Lawyers Get to Know the Local Party and the Local Terrain?
明君賢將，所以動而勝人，成功出于眾者，先知也。 先知者。。。必取于人知敵之情者也。 What enables the wise sovereign and the good general to strike and conquer, and achieve success beyond that of ordinary men, is foreknowledge. Foreknowledge … is obtained through those who know the adversary’s dispositions.
孫子Sun Zi The Art of War Chapter 13 “Spies” 6th Century B.C.
PAMIR Law Group An International-Style Law Firm and Business Consulting Firm Based in Greater China: Taipei Shanghai Beijing
Provide Strategic Insights and Implement Practical Legal and Business Solutions in Greater China Thirty-Year Track Record of Successfully Closing Transactions In a Broad Range of Industries In the PRC and Taiwan
Trade Finance Services for Taiwan Companies in China
Strategic Market Entry/ Expansion Studies, Plans and Implementation
Government Relations and Law Reform
Legal Services
In-House Counsel Support Network
Legal
Direct Investment Due Diligence Services
PAMIR Law Group Taipei-Shanghai-Beijing
Partner Matching Services
Global Reach
CXO Business Consultancy Services
CXO Learning Journeys
Event Management Conferences and Seminars
Global Network
Fourth Link: Cross Straits Investment and Trade
The China Forum Online Speakers Portal Project
PAMIR Law Group Is a Member Of the “Renaissance” Network Of Co-Counsel Spanning 20 Cities In China:
Beijing
Chengdu
Dalian
Fuzhou
Guangzhou
Haikou
Nanjing
Ningbo
Qingdao
Shanghai
Shenzhen
Shijiazhuang
Suzhou
Wenzhou
Taiyuan
Tianjin
Wuhan
Xiamen
Yantai
Zhengzhou
How To Obtain More Information? Contact Michael D. Lee at Pamir Law Group: [email protected] Tel: (+886) 2-2536-9700 http://www.pamirlaw.com
SENSE & SENSIBILITIES PAN-ASIAN CROSS-CULTURAL ISSUES Michael D. Lee Pamir Law Group
Ancient Chinese Wisdom Applied to 21st Century Cross-Border Venture Capital & Private Equity Transactions
知己知彼，勝乃不殆 知地知天，勝乃可全 If You Know Yourself and Know Your Adversary Victory Will Not Be in Doubt; If You Know the Land and the Skies, Victory Will Be Complete
孫子Sun Zi The Art of War Chapter 10 “Terrain” 6th Century B.C.
21st Century Translation for International Corporate Lawyers: Know Yourself (aka Your Client) Know the Opposing Party and Their Lawyer Know the Terrain (aka Local Business Culture, Regulatory Environment and Balance of Relative Comparative Advantages)
To “Know” Means to Know the Party’s (or the Regulator’s) Personal and Institutional Concerns Bargaining Position Goals for the Transaction Motivating Factors (What Makes Them “Tick”?) Decision-making Dynamics and Influences Who Has Ultimate Say What Will Bring Them to “Yes”
Common “Terrain” Issues in Asian Jurisdictions Surrounding Environment and Key Relationships More Important Than “Paperwork” Family-Owned Businesses Hierarchical Mentality/Centralized Decision-making Power Preference For Tax Haven/Tax Efficient Jurisdictions Preference For “Sticks” Over “Carrots” (Tendency to Punish Wrongdoing Rather Than to Incentivize Good Behavior) Haggling Culture
The Terrain: Surrounding Environment and Key Relationships Over “Paperwork” Deals are made when the two bosses agree, and they leave it to their underlings to handle the “paperwork” ……. Sometimes afterwards!
The Terrain:
Environment and Relationship Over “Paperwork” What This Means for Lawyers…
A Lawyer’s Worst Nightmare? An Already Signed Contract (or Bar Napkin!) No Due Diligence; No Reps & Warranties; No Outs! Lack of Government Approvals? Potential Liabilities for Directors or Mr. Bossman? Legal Documentation Viewed As A Formality Lots of Cleanup “Paperwork”
The Bright Side….. No Argument Over Principal Terms The Deal is Set and Will Close (If Not Already…..) The Client (and Other Side) Might Sign Anything You Give Them
The Terrain: Family-Owned Businesses Focus on Keeping Costs Down Shortcuts to Avoid Government Red Tape May Not Be Used to Thinking Globally or Long Term
Centralized Decision-making Power (sometimes for generations!) Larger Family Business Are Diversified, and Some Are Involved with VC and Private Equity Investments
The Terrain: Family-Owned Businesses What This Means for Lawyers… No (or Low) Legal Budget Not Used to Using Lawyers for Preventative Measures or Negotiations Lack of Sophistication or Limited Contact with Non-Local Companies Lots of Due Diligence Issues (Zoning Issues, Lack of Approvals, etc.) Accounting Issues (Is the Revenue Where They Say It Is?) The Negotiator May Not Be the Decisionmaker The Negotiator May Be A Family Member with No Business Experience (But A Lot of Influence Over Ultimate Decisions)
The Terrain: Preference for Tax Haven Jurisdictions Many Asian Jurisdictions Assess Income Tax on Local-Source Income, Hence the Preference to Use Tax Haven or Tax Efficient Jurisdictions to Incorporate or Hold Operating Companies Common Tax Haven Jurisdictions Used: British Virgin Islands Cayman Islands (especially if IPO is the goal) Samoa Bahamas Pacific Island Nations That Allow Memorandum & Articles of Association to Be in Non-English Languages
Common Tax Treaty Jurisdictions Used to Reduce Tax in Asia Mauritius Netherlands Antilles & Netherlands Labuan Ireland
The Terrain:
Preference for Tax Haven Jurisdictions What This Means for Lawyers…
Understand Client’s Goals to Properly Structure the Corporate Scheme with Local Counsel Obtain Proper Advice to Ensure that the Client Knows What to Do to Maintain (and Not Lose) its Tax Efficient Status May Need Input from Client’s Accountants Working with Local Counsel from Tax Haven/Tax Treaty Jurisdictions For VC deals, check that special VC terms, such as conversion and anti-dilution, actually work under the Companies Law of that jurisdiction
The Terrain: Hierarchy & Centralized Decision-making Power Hierarchy of Rank is Apparent in Most Asian Cultures A Person’s Rank Determines His/Her Level of Decisionmaking Ability Always Need to Ask the Boss for Decisions Outside His “Box” Underlings are Reluctant to Take Responsibility (“C My A” mentality) Regulators Cannot Approve Anything “Out of the Ordinary”
Government Bureaucracy, Bureaucracy, Bureaucracy !
The Terrain: Hierarchy & Centralized Decision-making Power What This Means for Lawyers… Addressing People By Their Titles, Rather than First Names Opposing Party’s Negotiator (or Government Regulator) Always Needs Upstairs Approval (Possible Delay Tactic) Negotiator (or Regulator) Won’t Budge on Issues (for fear of being punished for giving into demands) Negotiator (or Regulator) Sticks to “How Things Have Always Been Done” (to avoid having to explain a novel concept to the boss or to persuade the boss to accept something new) Bureaucratic Nonsense and Delays Must Know How to Grease Bureaucratic Wheels (Legally, that is!)
The Terrain: Preference for “Sticks” Over “Carrots” (Tendency to Punish Wrongdoing Rather Than to Incentivize Good Behavior) To Behave Is Expected, So Misbehavior (Naturally!) Leads to Punishment
The Terrain: Preference for “Sticks” Over “Carrots” What This Means for Lawyers… Liquidated Damages or Penalty Clauses Tangible Pressure on the Portfolio Companies from VCs Performance Milestones Super-conversion Clauses (Preferred Stock Converts to Common Stock at 1:1.X or 1:2, etc., in the event milestones are not met, rather than the standard 1:1) Use of “Full Ratchet” Anti-dilution Clauses Much More Common than in the U.S. Redemption Clauses with Time Deadlines for IPO
The Terrain: Haggling Culture
In Asia, Buyers Are Expected to Haggle. Period.
The Terrain: Haggling Culture What This Means for Lawyers…
Counsel Buyer Clients Not to Appear Too Eager “Nickel-and-Diming” and “Second and Third Bites at the Apple” are Common How Do You Let the Other Side Know that “This is the Deal. Period.”? Know When to “Go Silent.”
How Do International Lawyers Get to Know the Local Party and the Local Terrain?
明君賢將，所以動而勝人，成功出于眾者，先知也。 先知者。。。必取于人知敵之情者也。 What enables the wise sovereign and the good general to strike and conquer, and achieve success beyond that of ordinary men, is foreknowledge. Foreknowledge … is obtained through those who know the adversary’s dispositions.
孫子Sun Zi The Art of War Chapter 13 “Spies” 6th Century B.C.
PAMIR Law Group An International-Style Law Firm and Business Consulting Firm Based in Greater China: Taipei Shanghai Beijing
Provide Strategic Insights and Implement Practical Legal and Business Solutions in Greater China Thirty-Year Track Record of Successfully Closing Transactions In a Broad Range of Industries In the PRC and Taiwan
Trade Finance Services for Taiwan Companies in China
Strategic Market Entry/ Expansion Studies, Plans and Implementation
Government Relations and Law Reform
Legal Services
In-House Counsel Support Network
Legal
Direct Investment Due Diligence Services
PAMIR Law Group Taipei-Shanghai-Beijing
Partner Matching Services
Global Reach
CXO Business Consultancy Services
CXO Learning Journeys
Event Management Conferences and Seminars
Global Network
Fourth Link: Cross Straits Investment and Trade
The China Forum Online Speakers Portal Project
PAMIR Law Group Is a Member Of the “Renaissance” Network Of Co-Counsel Spanning 20 Cities In China:
Beijing
Chengdu
Dalian
Fuzhou
Guangzhou
Haikou
Nanjing
Ningbo
Qingdao
Shanghai
Shenzhen
Shijiazhuang
Suzhou
Wenzhou
Taiyuan
Tianjin
Wuhan
Xiamen
Yantai
Zhengzhou
How To Obtain More Information? Contact Michael D. Lee at Pamir Law Group: [email protected] Tel: (+886) 2-2536-9700 http://www.pamirlaw.com
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