Having done business around the world, especially mergers and acquisitions and joint ventures, it has become apparent to me that the better the legal system in the home environment and more comfortable people are with it, the more likely the failure of cross border dealings.
Looking at legal systems as a continuum, starting with the US and UK at one end and moving from the developed world to the emerging world at the other end, the quality of the legal system declines. The decline is due to the differences in the legal systems (this occurs even between developed countries, i.e. USA and Italy), independence of the judiciary, and political and local corporate influence.
Relationships
Due to the decline in the legal effectiveness of their legal systems, local businesses move from a contractual basis for any agreement to a relationship basis. If the legal system cannot protect you, then you need to be sure of your partner and so building a strong personal relationship enables you to keep the venture successful.
This is where the process starts to break down for many western businesses. A personal relationship is not a business relationship derived from negotiating across as table and sharing a strategic vision, but it is getting to know each other personally. In my experience, US businesses do not encourage socializing with work colleagues outside of work or with people in the industry. This trend is increasing as corporations terminate people for what they have posted on social networking sites with regard to their beliefs and values.
As a result, many US executives do not invest the time to build personal relationships when operating in foreign countries. Furthermore many senior executives that are responsible for hundreds of millions/billions in revenues do not see the foreign company owners as equals because the foreign business is a fraction of the size. However, to the foreign owner, in their country they are just as important and expect to be treated as equals. Failing to do so dooms the relationship from the beginning.
For good information on relationships I would recommend reading:
For good information on relationships I would recommend reading:
- Understanding Cultural Differences -Germans , French & Americans - Hall & Hall
- Kiss, Bow , or Shake Hands - How to do business in 60 countries - Morrison, Conaway, & Borden (published by Adams Media corporation)
As the negotiations proceed, one of two things typically happens to the deal.
Roadblocks
All of a sudden issues start to arise. The issues make little sense to the transaction and much time is spent trying to spent resolve them. Once resolved, another one emerges and the transaction slows and frustrations arise which can damage the relationship if the deal gets done.
A quote I once heard that seems to apply in such situations is, “The problem is not the problem, but there is a problem.” The problem often is that the other party has not developed a relationship with you to the point that they are comfortable with entering into a business agreement. These issues are a way of slowing down the process so that they can spend more time building that relationship and getting comfortable.
When situations like this arise, it is wise to slow down, spend time on the relationship and allow the other party to get comfortable as it will lead to a more successful long term relationship.
Nothing
Nothing! "The simplest form of denial is delay", a Chinese proverb. Nothing here means that the negotiations just continue as though everyone was in the UK or the US. These can be the worst situations as it often implies the following:
· The other side has little interest in the deal and is just going through the motions to learn as much about you, your company, your products, processes and prices as they can or just to save face. As a result, a lot of time and money is spent negotiating a transaction, only to have it fail to close for reasons that are never fully understood.
· The other side has all the power in their jurisdiction and so the negotiations are largely irrelevant. There are so many examples of this, but a few to think of are the issues BP has recently had in Russia and Rio Tinto had in China; or
· The other side sees a contract merely as reflection of where the negotiations were at specific point in time. However, negotiations are expected to continue post signing. This latter point I have encountered often in China.
An example of this arose when discussing a US company’s global expansion plans with its Chief Financial Officer (“CFO”). This company was successful in the US with sales in excess of a billion, but according to the CFO, it international joint ventures had all failed to meet expectations to date. However, the company was negotiating a joint venture in China which it expected to become a substantial part of its future business due to the potential growth of the Chinese market. The CFO added that a major international law firm was handling the negotiations and document preparation for them. Obviously they would have a good contract for the joint venture, but the concerns rose when the CFO said the following:
· Neither he nor the CEO had been to China to meet their opposite number in the Joint Venture; and
· The Chinese joint venture party was a wholly owned subsidiary of the City of Shanghai, so it was powerful enough to deliver the expected benefits.
My immediate concerns were that the US executives had built no relationship with its joint venture partner, so how was going persuade its partner to do what it wanted when difference arose. In addition, how were disputes going to be resolved? While the legal agreements would lay out the remedies if a dispute arose, could the US company win a lawsuit in China against the City of Shanghai; and if it could, could it enforce it any judgment. More success in its international joint ventures would surely have come from spending time in these foreign countries building closer relationships with their partners and a greater understanding the markets and its sphere of influence in the joint venture.
Recommendations
Therefore, for many companies looking to do joint ventures or acquire companies in some of these jurisdictions, you should:
1. Build strong personal relationships
This needs to be between the business operators and not just the joint venture/M&A teams.One dinner does not a relationship make! Especially not if the dinner is the closing dinner. Get to know the people and their families. In many of these countries, if you haven’t been invited into their home, you don’t have a personal relationship.
2. Get on plane
Regardless of the desire to keep corporate expenses low, you cannot build a relationship over the phone or e-mail. This is done face to face, and often over meals. Understand their culture and history. You will be build relationships quicker if you know about their country, culture and history and especially as they see the world, not through the eyes of your own domestic media.
3. Understand the domestic power structures
Who controls your joint venture partner? If it is a local government entity or as is often the case in China, the army, how do you protect yourself and what do you do to limit the downside risk. Build relationships with people further up the chain of command and in the controlling vehicles. Also if you want to take the business somewhere they don’t want to go, don’t be surprised if you are harassed. Be prepared for it.
4. What you take in you leave
In many countries, the protection of intellectual property is low and so be prepared for whatever you take into the country will be copied or sold with your logo by a third party. Be aware of such situations and determine how to protect your intellectual property and YOUR BRAND.
Legal Documents
Don’t ignore the legal documents, have good ones prepared by good lawyers, but don’t solely rely on them, the other side isn’t. However, have a good local attorney to support your domestic attorney to help you with the unwritten rules.
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