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Business Meeting




Joint venture agreement

A footwear trader from the United States wanted to form a joint venture Hong Kong company with its major supplier in China that the latter would manufacture orders from the former at pre-determined manufacturing costs plus a reasonable mark-up subject to periodic reviews by both parties. Years of mutually-beneficial relationship was the foundation of their co-operation but each side didn’t know much about the other’s culture, what exactly its prospective partner wanted to achieve from the joint venture, their concerns, red line and how to resolve when the business result, trajectory or operations did not turn out to be what they had envisaged/agreed on, or when the other side wanted to sell its shares.

We were appointed to draft a shareholders agreement (“the Agreement”) to protect the shareholders’ interests. The China manufacturer contacted us first as we were introduced by a referrer that we had provided consulting service to before. The manufacturer was concerned for language and culture barriers, they would not be able to express their concerns succinctly to the American trading company. Knowing that we were familiar with Chinese and Western culture and had rich previous experience they trusted we could drive the matter to protect the interests of both shareholders.

At the first meeting with them we were unequivocal that as a consultant we would only work to serve the best of both parties’ interests without favouring one. The key executives of the American company asked a lot of questions as to our knowledge, experience, methodology, and how we would safeguard impartiality.

After gaining their trust through elaborating our past jobs and addressing their concerns, we designed a scope of the Agreement, and sent it to them for review and feedback; thereafter had a few rounds of communication with them separately and together.

There were certain difficult parts in the job.

  • To work out the transfer price formula from the Chinese manufacturer to the American trader that was seen fair to both as the purchase price to the Hong Kong joint venture company;

  • To narrow the gap and provide advice on their sometimes opposing views and concerns; and

  • To bridge understanding between them, interpreting the nuances of language beyond its literal meaning.

After the final draft in English and Chinese was done and agreed to by both parties, the English version (the Chinese version for reference) was sent to a lawyer in Hong Kong appointed by them for review and touch-up from the legal perspective. A lawyer’s input is to present the document in an explicit manner, pick up points that need to be rephrased to express better in the legal context and add further provisions to protect both parties but he cannot work out the Agreement because his expertise is not in constructing a document that involves the practicalities of how a business is run.

All along when the Agreement was amended, we provided translated Chinese text to the China manufacturer and made sure they were adequately informed without misunderstanding.


Divestment consultancy

Two European manufacturers from the same country, operating side-by-side at an industrial compound in a city in Guangdong Province, PRC, decided to divest. One was in manufacturing of special fabrics and the other in dyeing. They formed a joint venture company in Hong Kong (shareholders their holding companies in the home country and shares equally split) to sell the finished products (dyed special fabrics) and they had other sales channels to conduct their own business. The sale included the Hong Kong company and the 2 factories (each a wholly foreign-owned enterprise) in China.

We were appointed to act for them as their consultants to work with the prospective buyers and their advisors and consultants (together “the buyer side” for each of the prospective buyers and their team).

We first had to design how to prepare a library of documents that the prospective buyers would be interested to access with a clear index system that covered besides the financial documents (past audit reports, management accounts, future projections, profits tax returns and payments, other tax payments, and bookkeeping records), the incorporation and annual registration documents, organization structures, products information, management background, company secretarial records, fixed asset lists, intellectual property and others.

Our work was to act as the party that helped handle the enquiry and questions from the buyer side, to filter them what was required to be provided and what was not, and to prepare and provide information and documents in a timely manner in the same degree to the identical and similar questions from each interested buyer.

We assisted the seller to accommodate the on-site due diligence conducted by the buyer side with the principle of “need to know” basis without disclosing more than what was required.

It was a highly stressful job for any question or document required by the buyer side was urgent that we had to provide reply in a very short period of time. Each on-site due diligence took five working days or so to complete. Lots of questions were asked and as work progressed, questions got more in-depth.

After the on-site due diligence came the review session by the buyer side and we had to clear up the outstanding and follow-up questions in the same efficiency.

There were 2 interested buyers. The stress was monumental, having to work with auditors, company secretaries, tax advisors, the management, internal staff, other advisors and consultants, and lawyers to deliver reply.

Sale of the business took five months to complete. The first buyer later pulled out. We worked tirelessly to contend with the demands of the second buyer in the due diligence and deliberation process.

It was a nice job done though a poignant reminder of how unwilling the sellers were to let go their businesses.

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