Read our latest coverage on the scramble to get American law firms � and lawyers � into China.
That’s on top of standard environmental compliance and intellectual property analysis, including patent ownership concerns.
“Due diligence is the most consuming part for an acquisition of a Chinese company,” said Jones Day’s Z. Alex Zhang.
Christopher Stephens, managing partner of Orrick, Herrington & Sutcliffe’s Asia offices, said the most sensitive areas are compensation, transactions between a listed company and its affiliates, and relationships with majority shareholders, since they’re often indirect entities of the central or local Chinese government.
“The fact that they have to be disclosed is sometimes undesirable,” he said.
And awkward � Chinese companies are unaccustomed to outsiders rummaging through their most sensitive information.
Those barriers can often be eased by being on the ground and speaking Mandarin, said Scott Kline, a Thelen Reid Brown Raysman & Steiner attorney, who works with Chinese clients.
“To be able to go to the client, and ask questions in Mandarin, while having knowledge of U.S. law, and not having to go through translation, is incredibly important,” he said. “The extra handholding is worth it to create quality companies with very favorable operations,” he said.
Encountering roadblocks to a smooth IPO � such as internal corruption � is part of the practice. So, the attorneys said, it’s vital that companies have a system of checks and balances in place so that when questions arise, the company can pinpoint the problem and solve it rather than appearing as if their entire staff is corrupt.
“The U.S. focuses on the nature of the system in place � the ones penalized most are ones that don’t have systems in place,” Stephens said.
“Then, if there are problems, we can point to what was done and show that the problem arose with one individual and isn’t endemic and isn’t the result of not having appropriate systems in place,” he added. “Then, you can avoid some of the more harsh sanctions.”
Chinese companies often hit their first U.S. snags early, when it comes time to submit audited financial statements.”It’s a far greater level of diligence,” Thelen’s Kline said.
At times, Kline and his firm are introduced to companies that just aren’t ready � or willing � to begin the process of becoming a publicly traded U.S. company, and they walk away.
“If the management isn’t willing to bring along changes, we know the fight later will be too great,” he said. “But if we have motivated and intelligent management willing to make changes, all of the other things � making structural changes in how they report and operate, how they report financially � all of that certainly is not insurmountable.”
