China: rising economic power strengthens international influence of PRC and Hong Kong law

CHRIS CROWE

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British expatriates working in Hong Kong used to be termed FILTH: ‘Failed in London, try Hong Kong’. The slur is rarely used these days, particularly as Hong Kong is the key financial and legal centre for the People’s Republic of China (PRC) – the fast rising, global economic superpower – and its dealings with the rest of the world.

As an illustration of China’s economic might, its Ministry of Commerce (MOFCOM) revealed that the nation made direct investments into 5,090 overseas enterprises in 2013, with a total value of US$90.17bn in non-financial direct investments. While many of its outbound investments will be governed by the local law of the target company’s home jurisdiction, the laws of England and Wales, and New York, will also often be used.

David Dali Liu

English and New York law have vied for prominence in governing international transactions for decades, but with China’s emergence and investment appetite, Hong Kong and PRC law are an increasingly significant addition to the mix.

According to a recent Practical Law Company survey, these 'big three' foreign laws govern a high proportion of China-related deals. Survey participants indicated that the most commonly used laws for China-related transactions were PRC (31 per cent), Hong Kong (24 per cent), England and Wales (18 per cent) and New York (11 per cent).

The data suggests that PRC law is a prevailing force when it comes to governing cross-border transactions, and this is largely down to it being the most commonly used law for foreign direct investment (FDI) into China. This is the natural choice because the foreign investor is able to identify the counterparty’s assets in China and enforce against them in the event of a dispute.

FDI into China amounted to US$63.33bn in the first half of 2014 according to MOFCOM, explaining why PRC law is so prevalent on China-related cross-border transactions.


‘For financing deals to back up outbound investments by Chinese banks, Chinese law and Hong Kong law are, increasingly, seen in the documents’

David Dali Liu
 Managing partner, Jun He, Shanghai

David Dali Liu, managing partner of leading PRC law firm and IBA group member Jun He, says that PRC law and Hong Kong law are also gaining greater traction because of the increasing global influence of the Chinese banks: ‘For financing deals to back up outbound investments by Chinese banks, Chinese law and Hong Kong law are, increasingly, seen in the documents.’

Hong Kong, PRC

The Practical Law Company data also highlights the pervasiveness of Hong Kong law in governing cross border transactions. Hong Kong law can be seen as a solid compromise for cross border deals, as it is close to home for the Chinese and other international counterparties draw comfort from Hong Kong’s common law legal system. Robert Lewis, the international managing partner of Beijing-headquartered Zhong Lun Law Firm comments: ‘The Chinese would often have a preference for Hong Kong law as an alternative because it is generally acceptable to foreign counterparties as it is based on English law.’

Alan Wang, a Beijing partner at Freshfields Bruckhaus Deringer says that Hong Kong law is especially important in Asia, because China is such an active investor in less developed jurisdictions such as those in Southeast Asia. Where Chinese investors are reluctant to transact under the law of the target’s home jurisdiction, such as Myanmar, Hong Kong law provides a concession to both parties’ interests.

GE Guangbin, head of the China desk at Singapore firm Rodyk, says that parties involved in cross-border transactions often think carefully about using a neutral law to govern the deal: ‘The parties may choose the law of a neutral jurisdiction when the parties cannot agree to choose the law of its own jurisdiction as the governing law, particularly when the target's home jurisdiction does not have a well-developed legal environment. Besides both PRC and Hong Kong law, English, New York, and Singapore law are often chosen to govern China-related transactions.’

English law and New York law are certainly the dominant forces outside of Asia. In Europe (including Russia), the Middle East and parts of Africa, English law has a considerable role to play in outbound China deals. New York law naturally governs many of China’s deals in the Americas.

In June 2014, China signed £14bn worth of trade deals with the UK, illustrating the potency of the economic superpower. In this instance, Wang expects English law to govern the deals, but recognises that PRC law will still be an important component: ‘I haven't encountered any situation where the Chinese have insisted that PRC law is the governing law, although that being said Chinese law plays a big part in the process particularly in relation to regulatory approvals. If you have a Chinese company buying another company in the UK, in most cases the governing law will be English law for the transaction documents, but there is a mandatory Chinese government approval process that needs to be gone through.’

Many lawyers are still somewhat surprised by the lack of attention paid to the choice of governing law and jurisdiction. Denis Brock, a Hong Kong based dispute resolution partner at King & Wood Mallesons, believes that there should be a greater focus on this at the start of transaction negotiations: ‘It’s like a bunch of lads on a grass pitch with painted white lines and being told to “play the game”. They ask “what game?” And they are told “we’ll tell you later”.  How do you negotiate a contract if you don’t know the rules you are playing under?’ 

In 2013, Wang led a Freshfields team that represented China’s Dalian Wanda Group on its £320m acquisition of Sunseeker International, Britain’s largest luxury yachtmaker, in a deal that was governed by English law. He says that many Chinese decision makers have grown accustomed to using English law in cross-border transactions. In May this year, Freshfields advised China’s Bright Food Group on its US$1bn acquisition of a majority stake in Tnuva, Israel’s largest food company. The deal was completed under English law with a dispute resolution clause for London arbitration. In this instance, while Israeli law is well developed, Bright Food and Tnuva chose the comfort of English law.

Wang remarks: ‘The Chinese are becoming increasingly sophisticated, they have a greater sense of how deals are done cross border and they increasingly appreciate the sophistication of laws such as English law and what they offer in those type of situations. Even now, PRC law is relatively well developed but with problems such as language difficulties it is very difficult for a foreign counterparty to accept PRC law to govern and this is generally accepted by Chinese investors.’

Just as important as the choice of governing law is the jurisdiction in the event of a dispute. Chinese investors are attracted by the sophistication of English law and New York law, as well as the transparency and impartiality of the English and US courts. Conversely, lawyers suggest that while PRC law may be the de facto choice for FDI into China, clients should be dissuaded from litigating in the PRC courts and offshore arbitration should be recommended wherever possible. ‘Hong Kong and Singapore are increasingly becoming the most popular offshore venues for arbitration in relation to China disputes,’ Wang remarks.


Chris Crowe is a freelance journalist and can be contacted at chris@crowemedia.co.uk