Monday, May 30, 2011

Listen to My Mother: JVs in Asia

The following article was written for the Korean language Legal Times.

My mother often told me, when I was much younger, to look both ways before crossing the street, carry an umbrella in the spring, and don’t go out alone in the dark. The advice can go along way for Korean companies doing business outside Korea.

As we all know, Korea companies lament over the fact that it is near impossible for Korean companies, with the exception of the most savvy and cash flush mega-conglomerates, to enter the Chinese, Indian and Southeast Asian markets without local partners if they intend to attempt to penetrate the local markets.

The common cry of Korean companies is to avoid JVs at all costs. In reality the issue is not the avoidance of JVs, but the procedure in choosing and dealing with JV partners. I have seen many Korean, American and European companies succeeded in India, China and Southeast Asia because of the active assistance of local JV partners.

Don’t let your clients attempt a venture alone without at least exploring the possibility of a local partner and normally success will come and the difficulties will be overcome by following my mother’s simple advice.

1. LOOK BOTH WAYS BEFORE CROSSING THE STREET.
Due Diligence, Due Diligence and More Due Diligence. Korean companies, attorneys and business advisors are notorious, throughout Asia, for jumping into roads without looking both ways. Often the situation is caused by an overemphasis on trust, an over respect for Quangxi, and by the greatest quality that most Korean’s hold – perpetual optimism.

The situation has caused criminal prosecutions for some, business failures for many and headaches for most.

Before your company or your client engages in any business, advise your company or client strongly to go through a full due diligence. I often find that Korean companies, often, fear that this will upset the anticipated partner. If this upsets the partner, you have the wrong partner.

All professional potential local partners should welcome due diligence, since it is a clear sign that the local partner is dealing with a true professional.

For example, when I work with American clients in Southeast Asia, all anticipated partners that have done business with Westerners expect that the anticipated Western partner will do a lengthy due diligence and the better potential local partners are even prepared for the sure deligence prior to the first face-to-face meeting.

One of the better-known companies in Vietnam, with JVs with companies from around the world, has an employee with the specific task of satisfying the due diligence needs of foreign companies.

However, my Korean clients, invariably, believe that they have already built “trust” and may lose this trust through the due diligence. All good businesspersons should care, primarily, about building respect and seeing if they can learn through the due diligence to respect the partner.

The mutual respect will lead, naturally, to a lasting trust.
Trust based on drinks, entertainment and casual encounters is either naïve or fleeting.

Additionally, if the due diligence leads to lack of respect by your company or client for the counter-party you have found either the wrong partner or our involved with a company or client that does not understand and will, likely, never understand the value of international partnerships and the uniqueness of international business. Both are clear signs of a non-justifiable risk.

2. CARRY AN UMBRELLA IN THE SPRING
Protect your company or client from the rain through a carefully drafted shareholder, O & M, non-disclosure/non-circumvention, technology transfer and license agreements and the like with liquidated damages, arbitration, and restrictive covenant clauses. I too often see Korean attorneys and Koreans with American law licenses simply using form agreements.

I have seen numerous shareholder agreements from one of the largest Korean law firms that contain so many logical and grammatical errors that the agreement is laughable - at best. In addition, this form agreement excludes many clauses that provide added protection for clients that should immediately come to the mind of any experienced lawyer doing business abroad.

Also, you must have a deep knowledge of local law, customs and practices. In India, for example, many critical company decisions must be made through a super majority. Thus, a client with a majority shareholding may still be subjected to shareholder relationship issues.

3. DON’T GO OUT ALONE IN THE DARK
Your company and client must have a lawyer or an experienced consultant familiar with the local market on retainer. The person should not simply be one of the many ubiquitous Korean consultants with local language skills. Often these individuals have vested interests that prevent them from being trusted advisor. Sometimes, these individuals have nothing more than local language skills and a good smile.

One such person, I met, had a wonderful resume, a list of contacts that made him look like the Who’s Who of Vietnamese business and a warm and welcoming smile. In reality, he was nothing more than a fraud. I talked with one of the individuals that he claimed to be his “HuBae” and the man just commented that he met him once and now has been plagued with numerous uninvited visits, requests for meetings with his clients and unwanted calls.

If someone has a list of friends, a good smile and an entourage of young Korean girls that can speak the local language – he probably is a fraud.
Hire a local law firm that works alongside international attorneys and for your good, skip most of the ubiquitous Korean law firms in favor of local firms with international lawyers.

If you company and clients follow my mother’s advice to look both ways before crossing the street, carry an umbrella in the spring, and don’t go out alone in the dark – they will be well on their way to a successful relationship in China, India or Southeast Asia.

Find this post in Korean here

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SeanHayes@ipglegal.com