China Becomes Fiercer on M&A, Friendlier on IP
from
July/August 2007
by Charlie Deitch
Corporate attorneys doing business in China warn that new laws there are tightening bureaucratic control of investments by U.S. companies. Most notably, the Chinese government has given its Ministry of Commerce increased power over nearly all foreign mergers and acquisitions. The ministry has the ability to quash any deal that “may affect China’s economic security,” says John Donofrio, senior vice president and general counsel of Visteon Corp., a global supplier of automotive components and systems, which has 11,000 local employees in China.
Particularly troublesome is the latitude the Commerce Ministry has in reviewing deals and acquisitions by foreign investors that involve enterprises operating in key industries or owning well-known Chinese trademarks and brands. “The problem,” Donofrio says, “is that terms like ‘key industries’ and ‘economic security’ and ‘well-known trademark’ have not yet been defined. The ministry will have wide discretion to approve or disapprove a deal.”
Attorney Grace Fremlin, a corporate partner at Steptoe & Johnson, specializes in cross-border M&A and has done legal work in China since 1989. She agrees that the ambiguous oversight can threaten any deal made in the country, and sees it as part of a recent wave of Chinese protectionism.
Adds Jeffrey Blount, Fulbright & Jaworski’s partner in charge of the Hong Kong and Beijing offices: “As M&A lawyers, we’re concerned about what this will mean to the future of foreign investment.” What particularly worries him and other M&A attorneys is that in certain sectors, regulators are becoming less friendly to foreign investments. For example, foreign-owned companies are not permitted to hold a majority share in banking or telecom.
“The new rules,” says Blount, “may provide a clearer basis for regulators to submit to local pressure to block foreign-driven deals in China.”
What can companies do to head off problems? For starters, diligently conform to all the details of government rules and regulations. One big mistake foreign investors make, Blount says, is to put too much faith in their own guanxi—their personal relationships with Chinese business partners or government officials who they hope will advance their interests. With the Commerce Ministry monitoring deals, you need to be sure every decimal point is in place. “What’s getting people in trouble,” says Blount, “is they’re seeing those who preceded them reach a high level of success, and they’re emboldened by that, so they take risks they wouldn’t ordinarily take.” Don’t engage in business practices that you know are wrong, he warns, just because others may have gotten away with them in the past.
Tighter regulation has produced some good news too—in the area of intellectual property. Attorneys say that China has made progress in protecting and enforcing IP rights. Part of the reason, says Blount, is the country’s need to watch over its own growing trademarks and brands. Since Beijing was awarded the 2008 Summer Olympic Games, for example, the government has assertively shut down companies knocking off Beijing Olympics trademarks and mascots. As China grows into a land of trademark owners and IP owners and not just IP users and licensees, says Grace Fremlin, the enforcement of IP laws in China will get tougher and stronger.
Still, she says, “when you go into China, you have to go in ready to protect your trademarks. You have to be proactive. If your company has a reputation for fighting vigorously to protect its brands, your chances of getting ripped off are substantially reduced.”
Winning significant money judg-ments in IP-infringement cases heard in China continues to be difficult for foreign companies. But some are getting small, symbolic cash settlements. Nike won $20,000 in a lawsuit against the Beijing Metals & Minerals Import & Export Co., which had attempted to export knockoff Nike clothing to Russia. Microsoft was awarded a total of $12,120 from two companies, Beijing Central Press Union Technology and Tianjin Minzu Culture CD, that had pirated almost 60,000 copies of Windows XP. And a financial judgment of $20,600 was granted to three film companies filing a consolidated lawsuit. The three—Walt Disney Co., 20th Century Fox, and Universal Studios—had sued two Shanghai companies, Shanghai Hezhong Enterprise Development Co. and Shanghai Yatu Film Culture Broadcasting Co., which had illegally copied and sold movies including
The X-Files
,
Moulin Rouge
, and
Jurassic Park III
.
“They’ve come a long way but still have a long way to go,” says Blount. A persistent problem in IP protection, he says, is “local enforcement. You can get the court to issue an injunction against the infringing company, and you can even get a cash award, but if the local sheriff or government agent refuses to enforce the warrant against his cousin, it’s just words on paper.”
What to do then? Well, guanxi can help. So can an openness to negotiation, strange and unfair as the circumstances may seem. “This is China,” says Blount. “Everything’s negotiable.”
