05/10/2011 - 11:14

‘Asian century’ not without its challenges

05/10/2011 - 11:14

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Many Australian businesses have refocused their growth energies on Asia; but harnessing the tiger economies of Asia is no easy ride.

‘Asian century’ not without its challenges

WITH financial and economic uncertainty challenging established markets across the globe, increasing numbers of businesses are focusing their attention on Asia.  

The general economic consensus is that Asia represents the future for the growth of any international business. 

This includes Australian businesses, which are becoming increasingly outward looking as the local climate becomes more difficult.

When doing business in Asia, there are numerous legal, practical, and cultural aspects to consider.   

The experience of many international businesses setting up in Asia has been through a local joint venture. A local joint venture partner can bring a lot of positives, such as knowledge of local markets and competitors, pitfalls and opportunities. Many foreign businesses have, and continue to feel, that the only way to enter these markets is through strong relationships with local partners, and often this has meant giving local partners equity in the local business.

However, in many cases the local partners have not delivered or, where there has been a falling out between the local and foreign partner, the foreign party has not been able to do anything about it.  

Frequently, the joint venture arrangements agreed between the parties give too much control (either practical or legal) to the local partner and, once the relationship collapses, the foreign party has really no choice but to negotiate to reduce its investment or abandon the joint venture altogether.  

In other cases, notwithstanding reasonable contracts favouring the foreign party, the local party’s strong connections with the judiciary or administrative bodies means that the rights of the foreign partners are not enforceable and they not be able to recoup their initial investments.

In many cases, a troubled JV cannot be helped because their original joint venture agreement has been so poorly drafted as to preclude any real assistance.  

Some foreign companies fail to secure good legal representation when they go into JV deals, thereby leaving them with little or no options with how to fix the problems.  

Further, some foreign JV participants make basic mistakes that make it impossible to use the local laws and legal system to resolve the problems that have arisen.  

Though in many cases local courts do generally enforce foreign arbitral awards, the issues between JV partners more often rely on issues relating to control and operations, which typically require a local court ruling.

Across Asia, there has generally been a steady improvement of legal and judicial systems.  The entry into the World Trade Organization by Mainland China and other Asian countries has resulted in improvements in the members’ legal systems in order to ensure their compliance with WTO requirements.  Further, many countries have recognised that economic improvement can be achieved through improved legal systems, which allow them to compete more effectively and can bring about internal and societal stability.  

Asian economies have become far more integrated into the global economy and international community far more than ever before and therefore need to operate with the same systems and standards in order to compete. 

Judicial systems have been improved and laws are being more regularly enforced without regard to the identity of the parties. Due to improved law enforcement, there has been increased certainty and transparency and reduced levels of corruption. 

With the increased deregulation of markets across the Asian region, and the steady improvement of legal and judicial systems, there is increased opportunity for foreign parties to establish themselves through wholly owned subsidiaries with local partners. 

Foreign parties increasingly prefer local partners to participate in businesses through structures whereby the foreign partner can ensure a minimum level of certainty and security. Through these structures, the benefits of local partners (the connections and knowledge) can be utilised, while at the same time the potential negatives of local partners can be controlled through carrot and stick mechanisms.

That said, some imperatives remain when acquiring a local business in Asia or setting up a new business in Asia.

First, the local regulatory regime needs to be examined and considered thoroughly. The views as to the best practice for foreigners to operate in many marketplaces vary widely. Adopting a model whereby you try and get as close as possible, and piggyback with the local partner will not necessarily benefit you in the long run. 

However, some sectors in certain countries do remain heavily regulated and therefore a local partner may be essential. When structuring your business operations overseas you do need to give strong consideration to prevailing tax regulations.  

Certain jurisdictions, such as Mainland China and India, are becoming increasingly vigilant with regards to offshore structures, which are perceived as being used to avoid paying local taxes.  

Second, do your due diligence in the same way you would do at home.

Opportunities in Asia are often presented as things that must be grabbed quickly or lost. There is always a perceived ‘other bidder’ out there who is going to steal the deal way if you do not act quickly. It is suggested that, despite these pressures, you stick to your guns and do due diligence to the same extent you would at home. The potential skeletons in the closet can be far more frightening than those at home.  

Many M&A deals fail because of a failure to properly assess the compatibility of business practices of the target and the acquirer.  Global businesses are under increasing pressure to be vigilant about potential corrupt practices of, not just their subsidiaries, but also their partners, customers and suppliers.  

The potential public relations consequences of being associated with a business unit or a partner involved in illegal practices, such as dangerous products or child labour issues, can be completely devastating to any business.

Third, there is often cultural pressure to do the deal on the back of a napkin or by a handshake; this pressure should be strongly resisted. Local judiciary and legal systems across Asia are improving and being more reliable and accountable.  

Therefore, the argument that contracts will not be enforceable anyway (so why bother seeking a detailed contract?) has become much less valid.  

A more detailed contract, which removes any uncertainties related to a transaction will have a far greater likelihood of enforcement and be of far better value in protecting a foreign party in the future.   

The opportunities for M&A and investment in Asia are as strong as ever, and provided a vigilant and rigorous approach is taken to establishing and maintaining the relationships and operations, these opportunities can turn out to be successful and profitable.

• Brett Stewien is greater China partner, and Robert Edel AsiaPacific mining sector head, for international legal services firm DLA Piper.


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