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 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 law 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 a $3 million dollar lawsuit against an American company that had failed to pay for a Russian airplane it had purchased. But the paperwork reflected a $350,000 purchase price for the airplane. When we asked the Russian company why they told us the purchase was for $3 million when the paperwork said $350,000, they immediately told us the paperwork had been drawn up to save taxes in Russia. We declined the case.
- Our law firm once defended a case on behalf of a large shipping company involving $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 Taiwanese company (let’s call it Taiwan 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 Taiwan company was entitled to shares in the American company, but it was a completely different Taiwan company from Taiwan Company A. Let’s call this second company, Taiwan Company B. Our lawyers asked Taiwan Company A whether Taiwan Company B had received the ownership in the American company promised to Taiwan Company B and who exactly is Taiwan Company B. Taiwan Company A said it did not know whether Taiwan Company B had received those shares because Taiwan Company A and Taiwan Company B “no longer had a good relationship.” We declined the case, without even bothering to ask why Taiwan Company A had invested $8 million into an American company in return for that American company giving stock to another Taiwanese 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 formerly provided 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 companies that refused to retain lawyers to represent them on the deal or retained legal counsel inexperienced with foreign deals.
Now here’s the funniest thing about all of this (to the extent there is anything funny about all of this): when I discussed this WSJ article with one of the international 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 international 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 problems arise.
- No smart businessperson does international deals without first retaining a good lawyer.
The above prove the points.