Long ago, I once said on here that if we get at least three emails on a particular topic, we will write about it. I long ago received three emails on the Wall Street Journal article Did Xie Zhikun’s Nearly $1 Billion Go Missing? A Private-Equity Mystery but I am just now getting around to writing about it. To grossly oversimplify this terrific article, Xie Zhikun claims to have invested $1 billion into a U.S. based private equity company via a “share entrustment agreement” that specifies that he is the actual owner in a third Cayman Island Company. The Wall Street Journal says these sort of “agreements are commonly used by wealthy people who want to put money into shell companies without being identified in corporate records.” To grossly oversimplify the private equity company’s response: Xie Zhikun who?
And to grossly oversimplify the three emails I received regarding this article: WTF?
Let me just say that what is described in the article is shockingly common and my firm’s international lawyers often see the same sort of thing, including the following:
- A Russian company contacted my firm’s litigation team to pursue an $3 million dollar lawsuit against an American company that had failed to pay for a Russian airplane it had purchased. But when our lawyers saw the paperwork, it all reflected a $350,000 purchase price. When we asked the Russian company why they had told us the purchase was for $3 million when the paperwork said $350,000, they immediately told us that the paperwork had been drawn up that way to save them taxes in Russia. We declined the case.
- Our law firm once defended a case on behalf of a large shipping company involving an alleged $2 million or so in damaged cargo. But because the cargo manifest put the value of the cargo at something like $500,000 (presumably to avoid having to pay more for customs and or for insurance), settlement was based on the $500,000 figure, not the $2 million the cargo was allegedly (and realistically) worth.
- A Chinese company (let’s call it Chinese Company A) contacted us because it had never received the shares it had been promised for investing $8 million into an American company. Our review of the documents did say a Chinese company was entitled to shares in the American company, but it was a completely different Chinese company from Chinese Company A. Let’s call this second company, Chinese Company B. Our China lawyers asked Chinese Company A whether Chinese Company B had received the ownership in the American company promised to Chinese Company B and who exactly is Chinese Company B. Chinese Company A said it did not know whether or not Chinese Company B had received those shares and that was because Chinese Company A and Chinese Company B “no longer had a good relationship.” We declined the case, without even bothering to ask why Chinese Company A had invested $8 million into an American company in return for that American company giving stock to another Chinese Company.
- A Chinese company many years ago did what used to commonly be referred to as a “round-tripper.” Round-trippers were when a Chinese company would have someone in the United States form a US company and then that US company would go to China (hence the name round-tripper) as a foreign company able to take advantage of all the tax and other benefits China used to provide to foreign companies. Anyway, this Chinese company contacted one of our China lawyers based in China because it had become massive and it was looking at going public. Only one problem: it was 100% owned by a United States Limited Liability Company that had not paid any U.S. taxes for more than a decade. And here’s the real kicker: the U.S. LLC was 100% owned by the cousin of the founder in China and the founder had no clue where the cousin was in the United States, nor how to find him.
What’s the common thread in all of the above? They all involve a transaction that ran into problems because at least one key set of documents did not clearly reflect the deal, either because they were wrong on the amount of money involved or they were wrong on the parties involved. Many of these deals also involved Chinese (or Russian) companies that refused either to retain lawyers to represent them on the deal or retained legal counsel inexperienced with foreign deals. At least this was the case on all of the matters on which my firm’s international lawyers were approached to handle.
Now here’s the funniest thing about all of this (to the extent there is anything at all funny about all of this): when I discussed this WSJ article with one of the China attorneys in my firm, we spent all of maybe 15 seconds on it and our conversation was basically to note that “we’ve obviously been doing this China law thing too long because nothing in that article surprised me in the slightest.”
I feel compelled to conclude this post with a few words of wisdom, so here goes:
- What you put on paper will last a lot longer and be a lot more powerful than any side oral agreement you might have. Therefore think long and hard before you sign anything on paper that even resembles a contract.
- Whatever explanation the other side gives for needing the documents to reflect one thing even though the deal is supposedly based on another thing will almost certainly not matter or will be denied when the proverbial ______ hits the fan.
- No smart businessperson does international deals without first retaining a good lawyer.
The above prove the points.
Your thoughts?This article was written by Dan Harris and published on China Law Blog. Original Post: http://www.chinalawblog.com/2017/04/the-documents-are-the-china-deal.html