Current trends in venture capital and private equity in Asia include: 1) Understanding local business culture, regulatory environments, and how parties evaluate comparative advantages is key to successful deals. 2) Knowing the concerns, goals, decision-making dynamics and motivations of local parties helps structure optimal deals. 3) Common issues include preference for relationships over contracts, family-owned businesses, tax havens, hierarchy, and incentivizing good behavior through penalties rather than rewards.

1. Current Trends for Venture Capital/Private Equity:
SENSE & SENSIBILITIES
PAN-ASIAN CROSS-CULTURAL
ISSUES
Michael D. Lee
Pamir Law Group

2. Ancient Chinese Wisdom
Applied to
21st Century Cross-Border
Venture Capital & Private
Equity Transactions

3. 知己知彼，勝乃不殆
知地知天，勝乃可全
If You Know Yourself and Know Your Adversary
Victory Will Not Be in Doubt;
If You Know the Land and the Skies,
Victory Will Be Complete
孫子Sun Zi
The Art of War
Chapter 10 “Terrain”
6th Century B.C.

4. 21st Century Translation for International
Corporate Lawyers:
Know Yourself (aka Your Client)
Know the Opposing Party and Their Lawyer
Know the Terrain
(aka Local Business Culture, Regulatory
Environment and Balance of Relative Comparative
Advantages)

5. To “Know” Means to Know the Party’s (or the
Regulator’s)
Personal and Institutional Concerns
Bargaining Position
Goals for the Transaction
Motivating Factors (What Makes Them “Tick”?)
Decision-making Dynamics and Influences
Who Has Ultimate Say
What Will Bring Them to “Yes”

6. Common “Terrain” Issues in Asian
Jurisdictions
Surrounding Environment and Key Relationships More
Important Than “Paperwork”
Family-Owned Businesses
Hierarchical Mentality/Centralized Decision-making Power
Preference For Tax Haven/Tax Efficient Jurisdictions
Preference For “Sticks” Over “Carrots” (Tendency to Punish
Wrongdoing Rather Than to Incentivize Good Behavior)
Haggling Culture

7. The Terrain: Surrounding Environment and Key
Relationships Over “Paperwork”
Deals are made when the two bosses agree,
and they leave it to their underlings to handle
the “paperwork” ……. Sometimes afterwards!

8. The Terrain: Environment and Relationship
Over “Paperwork”
What This Means for Lawyers…
A Lawyer’s Worst Nightmare?
An Already Signed Contract (or Bar Napkin!)
No Due Diligence; No Reps & Warranties; No Outs!
Lack of Government Approvals?
Potential Liabilities for Directors or Mr. Bossman?
Legal Documentation Viewed As A Formality
Lots of Cleanup “Paperwork”
The Bright Side…..
No Argument Over Principal Terms
The Deal is Set and Will Close (If Not Already…..)
The Client (and Other Side) Might Sign Anything You Give Them

9. The Terrain: Family-Owned Businesses
Focus on
Keeping Costs Down
Shortcuts to Avoid Government Red Tape
May Not Be Used to Thinking Globally or Long
Term
Centralized Decision-making Power
(sometimes for generations!)
Larger Family Business Are Diversified, and
Some Are Involved with VC and Private Equity
Investments

10. The Terrain: Family-Owned Businesses
What This Means for Lawyers…
No (or Low) Legal Budget
Not Used to Using Lawyers for Preventative Measures or
Negotiations
Lack of Sophistication or Limited Contact with Non-Local
Companies
Lots of Due Diligence Issues (Zoning Issues, Lack of
Approvals, etc.)
Accounting Issues (Is the Revenue Where They Say It Is?)
The Negotiator May Not Be the Decisionmaker
The Negotiator May Be A Family Member with No
Business Experience (But A Lot of Influence Over
Ultimate Decisions)

11. The Terrain: Preference for Tax Haven Jurisdictions
Many Asian Jurisdictions Assess Income Tax on Local-Source
Income, Hence the Preference to Use Tax Haven or Tax Efficient
Jurisdictions to Incorporate or Hold Operating Companies
Common Tax Haven Jurisdictions Used:
British Virgin Islands
Cayman Islands (especially if IPO is the goal)
Samoa
Bahamas
Pacific Island Nations That Allow Memorandum & Articles of
Association to Be in Non-English Languages
Common Tax Treaty Jurisdictions Used to Reduce Tax in Asia
Mauritius
Netherlands Antilles & Netherlands
Labuan
Ireland

12. The Terrain: Preference for Tax Haven Jurisdictions
What This Means for Lawyers…
Understand Client’s Goals to Properly Structure the
Corporate Scheme with Local Counsel
Obtain Proper Advice to Ensure that the Client Knows
What to Do to Maintain (and Not Lose) its Tax Efficient
Status
May Need Input from Client’s Accountants
Working with Local Counsel from Tax Haven/Tax
Treaty Jurisdictions
For VC deals, check that special VC terms, such as
conversion and anti-dilution, actually work under the
Companies Law of that jurisdiction

13. The Terrain: Hierarchy & Centralized
Decision-making Power
Hierarchy of Rank is Apparent in Most Asian Cultures
A Person’s Rank Determines His/Her Level of Decision-
making Ability
Always Need to Ask the Boss for Decisions Outside His “Box”
Underlings are Reluctant to Take Responsibility (“C My A”
mentality)
Regulators Cannot Approve Anything “Out of the Ordinary”
Government Bureaucracy, Bureaucracy, Bureaucracy !

14. The Terrain: Hierarchy & Centralized
Decision-making Power
What This Means for Lawyers…
Addressing People By Their Titles, Rather than First Names
Opposing Party’s Negotiator (or Government Regulator)
Always Needs Upstairs Approval (Possible Delay Tactic)
Negotiator (or Regulator) Won’t Budge on Issues (for fear of
being punished for giving into demands)
Negotiator (or Regulator) Sticks to “How Things Have
Always Been Done” (to avoid having to explain a novel
concept to the boss or to persuade the boss to accept
something new)
Bureaucratic Nonsense and Delays
Must Know How to Grease Bureaucratic Wheels (Legally,
that is!)

15. The Terrain: Preference for “Sticks” Over
“Carrots”
(Tendency to Punish Wrongdoing
Rather Than to Incentivize Good
Behavior)
To Behave Is Expected, So Misbehavior
(Naturally!) Leads to Punishment

16. The Terrain: Preference for “Sticks” Over
“Carrots”
What This Means for Lawyers…
Liquidated Damages or Penalty Clauses
Tangible Pressure on the Portfolio Companies from
VCs
Performance Milestones
Super-conversion Clauses (Preferred Stock Converts to
Common Stock at 1:1.X or 1:2, etc., in the event
milestones are not met, rather than the standard 1:1)
Use of “Full Ratchet” Anti-dilution Clauses Much More
Common than in the U.S.
Redemption Clauses with Time Deadlines for IPO

17. The Terrain: Haggling Culture
In Asia, Buyers Are Expected to Haggle. Period.

18. The Terrain: Haggling Culture
What This Means for Lawyers…
Counsel Buyer Clients Not to Appear Too Eager
“Nickel-and-Diming” and “Second and Third Bites
at the Apple” are Common
How Do You Let the Other Side Know that “This is
the Deal. Period.”?
Know When to “Go Silent.”

19. How Do International Lawyers Get to Know
the Local Party and the Local Terrain?

20. 明君賢將，所以動而勝人，成功出于眾者，先知也。
先知者。。。必取于人知敵之情者也。
What enables the wise sovereign and the good
general to strike and conquer, and achieve success
beyond that of ordinary men, is foreknowledge.
Foreknowledge … is obtained through those who
know the adversary’s dispositions.
孫子Sun Zi
The Art of War
Chapter 13 “Spies”
6th Century B.C.

21. PAMIR Law Group
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Consulting Firm Based in Greater China:
Taipei
Shanghai
Beijing
Provide Strategic Insights and Implement Practical
Legal and Business Solutions in Greater China
Thirty-Year Track Record of Successfully Closing
Transactions In a Broad Range of Industries In the PRC and
Taiwan

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23. PAMIR Law Group Is a Member Of the “Renaissance”
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24. How To Obtain More Information?
Contact Michael D. Lee at Pamir Law Group:
mlee@pamirlaw.com
Tel: (+886) 2-2536-9700
http://www.pamirlaw.com