New England Biz Law Update
Making a cross-border acquisition work is no small trick,
particularly when most of the players involved are Chinese but the transaction
is structured to look like a U.S.-style deal for capital markets.
“You have two jurisdictions with two very different and very
proud historic and legal traditions and experiences. The level of sensitivity
on the legal side that one has to have to that fact is very important,” said
Boston attorney Timothy B. Bancroft, who represented SOHU.com in recent
acquisitions totaling $36.5 million.
One of the primary responsibilities of the Goulston &
Storrs legal team headed by Bancroft was to structure the deals in a manner
that was consistent with U.S. deal structure standards, in part because SOHU is
traded on NASDAQ and “in part because the global village is looking at
those norms as the overall standard,” said Daniel Avery, Bancroft’s
colleague.
Part of the challenge, according to Avery, was to
incorporate U.S. practices in a way that actually worked under Chinese law and
was consistent with and respectful of the business norms in China since that’s
where the buyer and sellers were.
“The general concept goes well beyond the regulatory or
legal choice of law or venue,” Avery says of cross-border M&A work.
“The challenge of doing these kinds of deals is to integrate business
cultures, norms and practices that are very different. It’s not that one is right
or wrong, but that they’re simply different.”
Avery adds that it’s “beyond how you enforce a
judgment, but how you do business and get deals done.”
Avery’s advice to attorneys working on cross-border deals is
to simply step back and be respectful. He says some lawyers mistakenly try to
incorporate U.S. concepts where they may be inapplicable in the other
jurisdiction or potentially counter-productive.
“This tendency to have a paternalistic view of U.S.
customs and business customs can really slow down or even kill the deal, and it
certainly impedes on the relationships and the efficiency,” he observes.
His advice for U.S. attorneys who don’t have a lot of
experience with cross-border M&As is to listen and learn and “don’t
try to replace non-U.S. concepts with U.S. concepts. … In the broadest sense,
it’s about respect and recognition that different cultures have different
experiences, and two cultures integrate two ways of doing business.”
That respect goes both ways, Bancroft, Avery and colleague
Lara McKenna discovered. Beijing attorney Philip Qu and SOHU in-house counsel
Jasmine Zhou quickly demonstrated they “were good at recognizing in the
deal where U.S. concepts should go in or were appropriate to fill in the
gaps,” Avery says.
When Bancroft started representing SOHU.com back in 1996,
the Chinese Internet site was just another startup created by an MIT student.
But by last November it was ready to take on substantial
assets in a pair of deals. In the first transaction SOHU.com acquired 17173.com
(a division of the online gaming website Net Dragon based in China) for $20.5
million in cash. The second deal, which closed a day later, was an acquisition
of the real-estate portal website Focus.com. The $16 million purchase price was
payable in 80 percent cash and 20 percent SOHU stock.
Chinese Yahoo!
Bancroft compares SOHU to Yahoo.com in that “it’s an
all around website with all kinds of services, [including] chat groups, college
alumni clubs, services, search engines and news services.”
One thing that distinguishes SOHU from U.S. search engines,
he notes, is that many of SOHU’s services are delivered by cell phone, which
has helped drive up its profitability in the last year-and-a-half.
According to Avery, SOHU is also part of a recent
“cross-border phenomenon” between the United States and China of an
entirely different sort: NBA basketball.
“More and more Chinese citizens are watching and
following NBA basketball – but in particular the Houston Rockets, where
7-foot-6-inch, Shanghai-born Yao Ming is a star player,” says Avery,
noting that SOHU operates the official NBA and Yao Ming websites in China.
“Press accounts claim that when Yao Ming participated
in an Internet chat on SOHU.com last year, almost 9 million users logged in to
participate, creating an enormous strain on the technology infrastructure in
many Chinese cities,” Avery adds.
U.S. companies have taken note of the opportunities to
advance their own products and services to the expanding group of Chinese
basketball fans, and Yao Ming recently signed new endorsement deals with
McDonalds and Reebok.
“There’s enormous opportunity in China and online
services have been looking at the Chinese markets as a key part of this
strategy – whether they’re intra-China portal services or U.S. portal services
as well,” remarks Avery. “There has been some very intense
consolidation within China in the Internet industry generally.”
That’s why the deals needed to be completed in one month –
about a third of the amount of time it takes under normal circumstances, the
attorneys say.
“There’s a relatively finite group of choice Internet
properties in China that companies that are able to consolidate want and will
be synergistic and ultimately accretive,” Avery explains. “When you
have a handful of sites and a group of consolidators with cash, it creates a
formula for intense competition. Part of the competition, in addition to the
obvious aspects of price, relates to how quickly the buyer and his or her legal
team can get the deal done.”
(A version of this article originally appeared in the
March 29, 2004 issue of Massachusetts Lawyers Weekly, a sister publication of
New England In-House.)
Questions or comments may be directed to the writer at
[email protected].
