One of the largest banks in China has been cleared by United States federal regulators to acquire a controlling stake in Bank of East Asia. Previous attempts to acquire controlling stakes in U.S. owned banks were unsuccessful. Click here for the article on Bloomberg.
In 2009, I was an attorney at United Commercial Bank (NASDAQ:UCBH) when China Minsheng Bank Corporation (Shanghai Exchange: 600016:CH) tried to up its 9.9% equity stake to a majority stake. This was the first time the United States was confronted with the possibility of having a Chinese majority shareholder bank authorized to operate a full operational bank in the United States. At the time, UCBH was in need of additional capital, otherwise it would lose the approximately 300 million dollars in T.A.R.P money (US taxpayer dollars) that had already been given to UCBH during the 2008 financial crisis. China Mingsheng’s bid was denied by federal regulators for various reasons, including questions about the viability of China Minsheng itself, risk management policies, anti-money laundering controls, and a general fear of the unknown about China’s banking system. Unfortunately, this was 2009 and almost 200 FDIC insured banks failed that year, a near unprecedented number of bank failures, and I believe due to the unique problems presented by a Chinese acquirer, the lengthy due diligence required by regulators, and general chaos in the financial system caused the deal to fall through before UCBH ultimately ran out of capital and costing U.S. taxpayers hundreds of millions of dollars.
One lesson I’ve learned over the years when doing international transactions, is do not underestimate the importance of culture, and I don’t mean the small thing such as presenting your business card to Chinese customers with two hands. I’m thinking more along the lines of broad based things such as major differences in transparency in the rule of law between the U.S. and the rule of law in developing countries.
For example, based on my experience working in China and in the U.S. working on deals with Chinese companies there are many official rules and regulations in China, not all of them are enforced, and others rules are enforced arbitrarily depending on how much favor one has with local officials. Some U.S. attorneys will try to work around the problem by stating that their contract will be decided by the laws of Hong Kong, U.S., or U.K. However, if you are actually dealing with a Chinese company in China, that contract isn’t really worth more than the paper it is printed on, especially if the contract is in English. Or for example, if a Chinese regulator is not familiar with certain U.S. customs or institutions, then the Chinese regulator may ask you for all sorts of things, such as, how does the F.D.I.C get its authority to do business, and you are left on a quixotic quest to explain to your China based attorney that the F.D.I.C. was created in 1933 via the Banking Act and then you hope and pray that this information is enough to clear Chinese regulators.