I found this interesting from the Norton Rose LLP website on Accessing Chinese solutions for mining Clients. Norton Rose has done some advisory service for China Development Bank and was also the advisor to Peter Hambro in their strategic investment in Rusoro (you can look up track record on their site).

Accessing Chinese solutions for mining clients

February 2010

Observations on dealing with Chinese entities

We have set out below some key observations that should be considered when dealing with Chinese entities. These observations are focused primarily on dealings with Chinese State Owned Enterprises (SOEs), given that SOEs are the major investors in the energy and resources sector, however these observations can in the main be applied to dealings with all other Chinese entities.

The observations are separated in two categories. First, transaction observations, which look at the different approach that Chinese people may have to the transaction process and key transaction issues. Second, cultural/relationship observations, which can have a key impact on the success or otherwise of a deal.

Transaction observations

Confidentiality Agreements (CA)

1. Often the first document you will sign; sometimes your first real interaction with a Chinese investor.
2. Western companies tend to treat with degree of informality and process; not often considered a major step in a relationship.
3. Chinese investor may be reluctant to sign a CA at outset.
4. Any agreement (including a CA) will have to go through multiple channels and processes internally for approval.
5. Your contact point is unlikely to have authority to sign the CA; decision making is often from the very top.
6. Unlikely to recommend internally to sign the CA until the project has been qualified as a potentially good project.
7. Expect to be asked for detailed (usually technical) information before a CA is signed.
8. Need to balance the risk of providing confidential information.
9. Good practice to provide the information noting that it is confidential (equitable duty of confidence) if no CA in place.

MOUs, HOAs & Co-operation Agreements etc (MOU)

1. MOU often requested/signed.
2. Same approvals issues for CAs apply.
3. Signifies an intention/interest in developing a relationship; often the first step in forming a business relationship.
4. The starting point for discussions. Not usually intended to signify a commitment to do a deal, but a commitment to talk (in good faith) about doing a deal.
5. Doubts as to whether MOUs are legally binding (due to commercial uncertainty), however they are morally binding.
6. Not necessarily as significant legally for Chinese investors as for Western companies; but demonstrates strong moral and business commitment.
7. MOU usually will contain a lot less detail than a western company(or lawyer) would consider the norm.
8. Public listed companies should take care when signing and announcing an MOU.
9. Lack of detail can help you but also harm you; need to strike a balance.
10. Often 1-3 pages for major deals and a lot is left unsaid; affords greater flexibility later.
11. When it suits, you may be held to what is stated in the MOU, even if not legally binding; relationship impacted if you walk away from an intention stated in the MOU.
12. Scrutinise a non binding MOU with the same level of detail as you would a binding MOU.
13. Consider impact of signing the MOU on competitive tension for your project.
14. May be seen to be aligned with a particular investor.

Resource & technical information

1. Critical area of focus early in the relationship.
2. Manage resource and technical information provision carefully.
3. All resources have positives and negatives; it is all about project economics and having solutions for any negatives.
4. Resist the temptation to present only positive matters at the beginning and drip feed the negatives or present them only at a later stage; can significantly impact on the relationship (trust). All issues should be presented, and queries answered, frankly and objectively.
5. Provide solutions to issues rather than simply presenting negative comments.
6. Shift of interest towards late exploration assets. SOEs are now less interested in greenfield/early stage projects/assets, and more interested in more advanced projects/assets which are producing/close to production.

Know who you are dealing with (including internal structures)

1. Don’t necessarily get into bed with the first suitor that asks for your hand; other competition for your asset can quickly disappear if you are linked with one suitor in particular.
2. Make sure your interests are aligned with the potential suitor.
3. This is easier in the uranium sector for Chinese investment given the limited number of SOEs authorised to import uranium.
4. Spend significant time considering your project and your suitor – conduct a detailed SWOT (strengths, weaknesses, opportunities, threats) analysis.
5. Your counterparty will be well prepared for negotiations and will have done extensive (technical) evaluations on your resource.
6. Internal politics in the investor organisation can affect you.
7. Make a real effort to understand the internal management structures within the investor organisation. This is difficult to do, however it will help you understand who the key decision makers are and the authority of the relevant persons that you are dealing with.
8. It is critical to the success of a deal to talk to the “right person” within a company. A mainland Chinese born person in your team can help enormously in this regard.

Due diligence

1. Extent of due diligence varies dramatically from organisation to organisation.
2. Those with more international deal exposure are very sophisticated at due diligence, particularly technical and resource quality.
3. SOEs who are new to international investments are less focused on due diligence.
4. Extent of due diligence is a balancing act (risk vs cost).
5. We see this as an increasingly important area.
6. Some key areas of focus that raise particular concerns:
   • Nature of mining tenements (including co-existing exploration and mining rights)
   • Native Title and Aboriginal Heritage (applicable in Australia)
   • Asset versus share acquisition differences?
   • Private royalty arrangements
   • Security over tenements
   • Pastoral leases
   • Nature and extent of approvals for project development
   • Environmental liabilities
   • Infrastructure access
   • Nature of unincorporated joint ventures (particularly legal ownership of JV assets and assets held by JV manager)

Chinese – English translations

1. Dual Chinese – English documents becoming more common.
2. Which language takes priority if the Chinese and English words conflict?
3. Some Western legal concepts are hard to translate into Chinese legal concepts:
   • Unincorporated joint venture
   • Tenements
   • Tag/drag rights
4. Non legally qualified translator may not be able to accurately translate the document.
5. Actively address this issue in the negotiations.

Negotiations

1. Greater degree of formality than Westerners are used to.
2. Usually one lead negotiator, with a supporting contingent.
3. Demonstrating respect for lead negotiator (and entire team) is critical.
4. Don’t do things that cause the other negotiation team to lose face:
   • Aggressive or rude behaviour
   • Beware of going around the negotiation team (high risk strategy if you are not adept at managing the issues that arise)
5. “Loss of face” sounds trite; but is critical.
6. Expect negotiations to take twice as long as you think they should (time can be a weapon).
7. Chinese negotiation team will be unlikely to make material commitments that vary from previously agreed points without detailed (internal) consideration.
8. Negotiations are not linear – when you have discussed (and seemingly “resolved”) an issue it may well be raised again later – the deal is a basket of rights and obligations.
9. Listen for the qualified “yes”; don’t over-estimate meaning of “yes” until the deal is done.

Cultural and relationship observations

Face and the loss of it

1. Don’t underestimate how important this is; and how hard it is for us to understand.
2. Face is an essential component of the Chinese national psyche.
3. Having face means having a high status in the eyes of one’s peers, and is a mark of personal dignity.
4. The Chinese are acutely sensitive to gaining and maintaining face in all aspects of social and business life.
5. Face is a prized commodity which can be given, lost, taken away or earned.
6. Causing someone to lose face can ruin business prospects.
7. The easiest way to cause someone to lose face is to insult an individual or criticise them in front of others. Another example could be circumventing the person that you are dealing with and approaching someone with a higher position within the company.
8. Giving face earns respect and loyalty, but praise should be used sparingly and with caution; over-use suggests insincerity on the part of the giver.

Mobilise Chinese assets early

1. Difficult for a “foreigner” to communicate and be trusted like a native Chinese person:
   • Language is difficult (business Mandarin essential)
   • Chinese way of doing business is complex
   • Strong sense of national pride
2. For mainland Chinese investors have an effective mainland Chinese ally on your team. They can:
   • Speak same dialect
   • Analyse body language
   • Work out who has the real power in the negotiation team (not always the lead negotiator)
   • Smooth over any inadvertent face issues
3. Conversely the presence of a Westerner should be encouraged. Chinese investors will often see a visit by a senior foreigner as an indication of sincerity and commitment by the Western company.
4. Work out who in the other negotiating team holds real power – not always the boss – and help smooth out any inadvertent wrinkles.

Beware linear logic

1. Western thought tends to be dominated by linear logic.
2. Chinese thinking is influenced by early philosophers, who saw a paradoxical balance of opposites in all things.
3. Westerners may tend to look for clear alternatives (option A instead of option B), Easterners may examine ways to combine both option A and option B.
4. Don’t be too quick to judge a different way of thinking as being illogical, evasive or devious. The other side may consider they are being perfectly straightforward.

Respect the hierarchy of society

Mao Zedong’s thoughts on discipline (published 1966) is a good insight into structures which persist in Chinese organisations even to this day:

“The individual is subordinate to the organisation. The minority is subordinate to the majority. The lower level is subordinate to the higher level.”

This underlies why Chinese society and companies tend to be very hierarchically organised, and why Chinese people seem to be more group orientated than individualistic.

Show a genuine interest in China and building a relationship

1. Demonstrate a genuine interest in Chinese culture and a desire to understand “the Chinese way”.
2. Obtain some basic knowledge of China, its history and culture before you commence negotiations/meetings.
3. Show a willingness to try Chinese food, drinks, cultural events.
4. Relationships are generally built outside the negotiation room; accept invitations to dinners, and reciprocate.

Some basics on Chinese etiquette and other tips

1. Greetings:
   • Light handshakes may be regarded as being disrespectful
   • Chinese name starts with surname; address by surname “Mr Li” and continue to do so
   • Exchange business cards with clients using both your hands and light bow. DO NOT throw business cards across the table
   • Let senior people enter and leave the room first
   • Don’t be offended by being asked private questions, for example, marriage status, age, family members, etc.
2. During negotiations:
   • Patience is golden
   • Don’t push aggressively for decisions; generally the Chinese negotiation team may not have authority to make a decision
   • Avoid sensitive political discussions, such as human rights, Tibet, internet and media freedom
   • Inviting Chinese clients out for dinner during the course of lengthy negotiation demonstrates good faith; choose an appropriate restaurant. If you can’t achieve what you want at the negotiation table, you might be able to achieve it at the dinner table
   • Drinking is a must for business dinner – particularly until a high level of trust and friendship is established
   • Show that you are a friend, not an opponent
   • Be prepared to make small concessions to demonstrate your good faith in the developing relationship
3. Closing the deal/signing:
   • Be happy; but not too happy
   • Signing is the commencement of an official long term relationship, it is a START of the deal
   • Put as much effort into the relationship post-signing as you did pre-signing
   • Don’t give clocks as gifts; signifies death

Issues such as these, coupled with the comparatively young framework of laws in China and the bureaucratic procedures which can often be encountered, mean that the acquisitions, financings and other transactions involving Chinese entities can benefit greatly from utilising the knowledge and experience of local advisers who can help them steer a course around these potential obstacles.

http://www.nortonrose.com/knowledge/publications/2009/pub23479.aspx?page=091005124052&lang=en-gb