Mergers & Acquisitions are different in China, so lots of the questions you may want to ask are not going to apply here

Our office is in the middle of a handful of existing entity restructuring or merger.jpgcorporate acquisition matters and it is rather odd how many times we find ourselves saying, "Yes, we understand the question but no that concept does not apply here..."  In fact, sometimes the Chinese system will have no equivalent.  And when you do try to impose a Western style legal idea here, they may smile at you politely, but privatley they are likely to think you are being a bit silly.

Sometimes that is because the legal system here is at a certain state of development and those concepts have not yet become commonplace.  But that is not what I am talking about here.  They know that part.  It is their system and they know those faults much better than we do and steps are being taken to resolve things like food safety testing, financial transparency and the like.

Sure, it will take some time and some of those are critical issues, but Rome was not built in a day.  It took us a while to get things kinda-sorta right in the US and in some ways we are still learning too.  But at other times, it has nothing to do with their legal evolution and China is still going to remain China.

So, it seemed an appropriate time to scribble a few thoughts about what kind of things your instincts may tell you to pay attention to -- that may have no equivalent here in China.  And no matter how many different ways you ask the question, the answer will remain the same.  Ok, like what?

For clarity, this is only a made up example for illustrative purposes and you should not try to use this as a generally applicable rule folks.

Let us say that a US public company is going to buy-out / acquire a Hong Kong private company.  What they really want is the Mainland China holdings of that Hong Kong private company, but they have to buy the whole tamale to get the part they want.  So the way the deal is structured, the US public company will take all their employees, contracts, rights, etc in China and the Hong Kong company will close all their old companies in Mainland China and Hong Kong and just cease to exist -- it disappears.

So, both companies have had operating companies here in China before and the US entity is going to basically absorb the entire operations of the Hong Kong entities operations in China.  As part of the deal, the Hong Kong company is going to wind up affairs of it's long-standing companies.  Let us throw a few thousand employees into the mix -- just for fun.  They will just jump ship out of the Hong Kong entity and land in the US entity that was already in Mainland China for some years too.

Thus, one day all those employees working for a Hong Kong public company and the next day they will be employees of the US public company.  Well, how does China look at that when it comes to things like acquirer liabilitiy?  Or another way to ask the question is -- what liabilities might the US public comapy be stuck with, and thus have to contract around, if the former owner has any historical problems in their China operations as they wind up corporate affairs?

The short answer is that it doens't matter and you need not lose any sleep over the question.  Why?

Well, that is because China does not believe in the concept of piercing the corporate veil.  It just does not exist here.  So, even if their were something wrong, they would not even try to reach up the food chain and back to Hong Kong company, much less to you, the acquiring the US public company. 

In fact, in terms of how China would look at this, if the soon-to-be former owner did in fact have any liabilities inside the Mainland operations of that Hong Kong company -- they would of course be dealt with in the process of that Hong Kong comany winding up corporate affairs and pulling out of the Chinese market -- and that would not have anything to do with the US public company.  If you tried to stick your nose into that, the Chinese would mostly likely just tell you to go away because it is none of your business.

So, that is why I noted here at the outset that the Chinese might think you rather silly when you were coming from the US and when doing so you brought your standard mergers and acquistions bag of tricks with you.  For that bag of tricks comes from and applies in the US and, often, very little of that will have any applicabiltiy here.

Think of it like a coat check room near the entrance.  Often you may just have to leave many of those ideas you brought with you at the door.