It has been a wild 12 months in the global PPE market. Last year when we started working on our first Covid-related PPE transactions, everyone needed N95 face masks, but many of the deals moved so quickly that virtually no companies slowed down enough to involve their attorneys. And if they did involve their attorneys, they wanted to move within 24 hours, which is faster than most law firms can get engaged and most companies can put down an advance fee for the initial legal review of the deal. Term sheets full of bullet points and invoices became the standard PPE contract.
Mask Deals Unmasked
The international dispute resolution lawyers at my law firm spent a fair amount of time in Q3 and Q4 of 2020 dealing with the fallout from those hastily-created PPE transactions, especially those that involved no lawyer at all or that involved a domestic lawyer without international transaction expertise (see here). Some of those deals were messy. Others were expensive. Most were expensive and messy. On the upside, everyone got really familiar with WeChat and WhatsApp, including the lawyers who had to sort through all of the frenetic deal making text exchanges that happened in someone’s middle of the night.
The fallout was painful for many companies, including those that borrowed funds to get into deals that eventually fell through. Masks that arrived late or never arrived; that arrived without head straps; that arrived with fewer than the required layers or used substandard materials; that were dirty; and that had human hair embedded in them. We also had common issues with freight forwarders losing and crushing freight. We found Chinese companies producing “FDA Certificates” embossed with the FDA logo and an eagle to show how “legitimate” their goods were.
Many PPE transactions fell apart because one party or another on the supply or buy side – or one of the many brokers in the middle – turned out to be inexperienced, uninformed, under-informed, or just plain cheats. Sometimes those issues were detected midstream, before the funds were transferred, and sometimes not.
I am, though, proud to say that so far as we know today, none of the transactions on which our team of PPE lawyers worked from day one went bad. Knock on wood.
Later in the year as the PPE market matured, many of the fraudsters, brokers, and buyers had learned to be more circumspect. They slowed down and honed their processes (including the fraudsters). Sometimes fraud still smelled like fraud, but with everyone in different time zones and setting up credible-looking PPE websites in under an hour, the potential for fraud remained and remains as high as getting taken in on any dating app. This potential for fraud remained relevant when the mask supply chain caught up to market demands and the profit curve leveled off. But the enterprising parties continued unabated, working on their big deals.
The Glove is on the Other Hand
The next PPE frontier became nitrile gloves, mostly from Malaysia, and that is the PPE wave we will all be riding for at least the next several months – probably well into the summer. Thailand is pushing hard to increase its production of gloves (see here), which will introduce additional supply and additional uncertainty. We expect our lead Thailand business advisor to be beyond busy for at least the next six months.
The advantages of countries like Malaysia and Thailand relative to China’s marketplace are unfortunately balanced out by the relative newness of doing business with Malaysia and Thailand for most buyers. Many buying groups in the U.S. are willing to forgo some profit (and even significant profit) to push 90%+ of the transaction risk onto the seller side so that the seller has to wrestle with all factory, initial financing, warranty, and country export and import issues. We are seeing unsophisticated sellers falling out of discussions early because they cannot stomach these transaction complexities and risks.
PPE deals, like most international sales of goods, require the right paper trail, and the intensity of that paper trail increases with the number of parties involved. Due diligence was often neglected in the early days of the PPE “wild east.” Buyers, sellers, and intermediaries are paying more attention to this foundational work. This is a factor of experience from 2020: those that were smart or lucky are able to continue in this market in 2021.
As lawyers we are thrilled to see this maturity among our clients and prospective clients, but we still find ourselves needing to request a deal be slowed down a bit so everyone can get comfortable with each other. We always encourage our clients to blame the slower pace on us and use us as their shield while we help them evaluate their prospective parties, which on average include at least the manufacturer, a line of 3-5 intermediary brokers, and the ultimate end purchaser.
Fundamentally, most of the PPE deals that have fallen apart were either flawed in the underlying facts or in the deal execution. When we say underlying facts, we are referring to the reality where the manufacturer or seller couldn’t provide what they promised or the buyer couldn’t get the funds together. When we refer to flawed deal execution, we generally mean that the businesspeople who were negotiating deal terms never bothered to slow down enough to involve a competent international lawyer to conduct proper due diligence and ensure that their interests were protected in the very likely event of something going wrong in the relationship.
In plain language, generally no one took the time to put their deal together the right way. Because we are in the thick of negotiating PPE deals, we’ll continue sharing our best practices with you as the market evolves. Stay tuned.
For more on the nuts and bolts of international PPE deals, check out the following: