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#38 - JRL 2008-154 - JRL Home
Date: Wed, 20 Aug 2008
From: "Paul Backer" <pauljbacker@gmail.com>
Subject: Survival Guide to Russia Business, Law, Regulations and Compliance

Survival Guide to Russian Business, Law, Regulations and Compliance
Part 6: Choosing legal counsel abroad, Part 1.
By Paul Backer, pauljbacker@gmail.com
["Survival Guide" Series - click here]

DISCLAIMER: This article is uncompensated. It is NOT legal advice. Everything herein is personal opinion. It does not represent anyone elses opinion. It does not address any current or past client or employer matter.

WHY A SURVIVAL GUIDE? Chasing a dream starts overseas businesses. Keeping a business operating and in your possession until your voluntary exit largely relies on the quality of your counsel and applying the 7Ps. Proper prior planning prevents piss poor performance. Have a clear strategy, choose the right team, and always look for your Exit. Avoidable failure is a great teacher, the pain, insomnia and regret help internalize lessons. The survival guides best practices (assessment, tools and implementation) drive positive replicable results.

SYNOPSIS: Choosing local legal counsel is a decision faced by every entrepreneur active in or entering a foreign jurisdiction. Your local lawyer is a much more important life partner than your local girlfriend. It is perhaps the most important choice an entrepreneur makes. The right lawyer will make you money, the wrong one could cost you your business. So, what do local lawyers actually do, and what kinds are there? What are your expectations toward your attorney? Are they realistic? Which type of attorney is most likely to achieve these results at the best price point? Systematize the selection of counsel to better target your resources for better results.

Principal/agent theory posits that by delegating authority to agents who have more time or expertise, principals accomplish their goals more fully. H.W. Perry, Jr.

Remember that the Chicken Man is not God. A sign outside the Chicken Man voodoo shop in New Orleans.

The need for onsite counsel to help establish, protect, monitor and exit overseas projects is self evident. The means of systematizing the process of effectively choosing an attorney is far less so, largely because clients view law as a form of magic rather than a service industry with specific and definable tasks. At some point, every attorney asks potential clients who and what they are looking for. You hear entrepreneurs describe their dream counsel. It is a tad unseemly, witnessing a man crush. The dream counsel is ethical, successful, tall, handsome, speaks colloquially perfect English and dreamy definitely dreamy with blue, lake-like eyes that the client could drown in. Sadly, the ability to verify real estate ownership 5 business days faster at 20% less cost is never mentioned, and none of the above is wholly exaggerated.

On one occasion discussed ideal counsel with a person who created businesses throughout Central and Eastern European and Russia/CIS and made hundreds of millions of dollars in gaming and telecommunications. A man worthy of genuine respect, tough, smart and lucky. He mentioned handsome as an important factor in choosing counsel. Handsome?!! Yes, because his lawyer is the public face of his business. He chose me. That is flattering. It also makes the world less logical and predictable than I am fully comfortable with. What is one supposed to do as middle age encroaches and good looks fade?! Goodwill ambassador?! Spare me. Try Angelina Jolie.

As an attorney in private and public practice, I pursued my clients interests, applying the pain of law to achieve their objectives, at other times it was all about compliance, due diligence, stamps and signatures. Sad, but true, in one transaction with a high risk of challenge we got a court stamp validating the municipal stamp validating the real estate registry stamp.

Ultimately, law is a service industry and to succeed a lawyer must identify and meet actual client needs. The following also help: a fetish for preparation, persistence and organization, working to compensate for cross-cultural noise and always being unfailingly polite. Even when a client forgets that 7pm in NY is 3am in Moscow, be polite. A clients dream counsel may be part model, part diplomat and part pitbull, but ultimately a lawyer has three core functions: Establish (initiation of new projects), Maintain (compliance, reporting and ongoing tasks to keep it running) and Exit (help the client get his money into a jurisdiction of his choice).

There is an infinite variety of transactions, project finance, factoring, revolving loans, IPO, Eurobond, PPP, LBO, MBS, etc. but I would argue that the legal tasks always fall into one of the above categories. Of course the telecom PPP, where a rat dog paddled up to me in a sewer and bit my Timberland boot is a bit hard to precisely define, but probably a Maintain task.

But, first a bit on cross cultural communication, the challenges of cross-cultural work. Any task performed outside of your home jurisdiction is cross cultural. It takes work, and sometimes the gap seems unbridgeable. A few years ago, a corporate boutique law firm was let go by a Russia/CIS bank. Losing a client is a learning experience and asked why. Explanation: we paid your firm for several years to handle compliance in the U.S. and EU. During those years we never had a single complaint or formal inquiry from the U.S. or E.U. regulators. Why are we paying you guys for nothing?

Funny, but not all that funny. The relationship failed, because of failure to address (lets be honest, failure to even anticipate) cross cultural expectations. A wholly avoidable and a pure lose/lose situation. The firm lost a client, the client lost an unblemished regulatory track record, since acquiring a regulatory complaint. Its not even about feelings, the law firm lost cash, money, greenbacks and the clients cost of borrowing went up by 50 to 75 basis points, due to investigation. What happened?

The Russian client felt that work was not being done, because they were not shown conflict on their behalf by their foreign-led boutique firm. Their local counsel for domestic compliance regaled them with tales of great obstacles and impossible challenges overcome. The American-led boutique didnt. The Russian client paid good money, and (from their perspective) nothing happened for years. The American-led boutique sought to meet a Western clients expectation that avoiding all visible regulatory conflict is top priority.

To keep the regulatory process as invisible to the client as possible, the lawyers pursued extensive onsite engagement in U.S. and E.U. As Western clients want the greatest possible insulation from any informal processes, the law firm didnt tell war stories to the client. The attorney leading the boutique counseled Russian attorneys working for the firm not to mention the close calls and the avoided confrontations. Lesson: if you are working for a client who does not share your cultural background, show the client the work being done. Its far better to be seen as a glory hog than bone idle. Better to over-report than under-report. Lesson learned, but there has to be a better way to learn than getting kicked in the wallet.

The easiest way to flatten the learning curve is to actively work to identify the clients personal and cultural expectations. Successfully performed corporate law tasks emulate other successfully performed corporate law tasks. Dont use your clients funds to fund your flights of fancy. It is a favorite bit when I teach corporate finance law, If you are doing legal for a corporate finance transaction and you find yourself doing something that is exciting, new and unlike anything being done by anyone in our industry, you are in one of two situations. Either you are a genius and thousands of corporate finance lawyers worldwide are idiots, or the other way around. Statistics do not favor you. If a lawyer finds his own unique way of writing a Eurobond or a PPP or an IPO, he increases his clients costs and imperils the transaction.

Cross cultural transactional autism is by no means unique to local clients. A Western private equity (hedge fund) organization with over a quarter billion dollars under management wanted to do a $40 million RF or Kazakhstan or whatever corporate bond, back in the stone age (late 1990s). Domestic corporate bonds, Eurobonds, IPO are very document intensive, but they are often offered at a fixed cost, because they are compliance oriented. They are predictable. They are all the same. The issues are always the same. Or should be. An inquiry was made, a price was quoted and accepted and the documents were drafted. Part of the project cost was a fee to local regulatory advisors representing unproductive rents. The American client wanted a receipt. The local regulatory advisor recommended antipsychotic medication. Hilarity ensued. And another attempt to finally bring coal to Newcastle failed.

This is where best practices shine. Assess to figure out what you want, what you are willing to put up with to get it and who can best deliver it for you. What do you want/need your counsel to do for you? What type of counsel is best situated to deliver those results for you?

First, do you need local counsel? Why not use your Washington or London lawyer? You should use them to coordinate workflow if you have several projects, but never use them as transactional lawyers for foreign projects. You need local counsel, because your lawyer in your local jurisdiction does not know the law in Russia/CIS. Even if a mistranslated copy of the local states Constitution and an outdated copy of the Civil Code are available online, that isnt transactional law. Constitutions and Civil Codes are not really law as far as specific transactions are concerned. Can you imagine arguing to rezone your property in Tenafly, NJ, motivating your request by quoting the Bill of Rights? Your home lawyer is often indispensable for managing workflow of your onsite counsel and he is great for telling you what is fair or not fair or the way the world should be, or why the locals just dont get it. He just isnt a transactional corporate lawyer in Russia/CIS.

Any American lawyer showing up in a Russian court to present your case, even if he speaks Russian is likely to doom your case. First, because he is not likely to have the relationships of a Russian lawyer, and second, because he doesnt understand that he shouldnt go to Russian court himself. It may have taken a better part of two decades, but it is one of the reasons why foreign major law firms in Russia and (primarily) Ukraine and Kazakhstan enmasse started making local nationals Partners.

A problem is that the structure of major law firms itself is geared to significantly advance some types of transactions (syndicated loans, foreign IPOs, foreign placement) and imperil others. If your local attorney is your eyes and ears, it is preferable to have eyes and ears that understand the local language, law, political debate and are not tone deaf. More on that in Part 2

Unless, of course, like the certain President of Georgia you court certain disaster to run about wailing the Whole world is watching, the whole world is watching! The world may be watching, but it isnt going to bring people back to life or in the case of a business, get your stuff back. Appearing on CNN, BBC, Euronews, etc. feeds the ego, but its awfully unfair to the people who died, were looted and dispossessed so that Mr. Saakashvili could get TV time. Gore Vidal said it best in Creation, if you cant count, dont enter the market or a war. To me, the Iraq and Georgia tragedies are of the same cloth, unavoidable reasons to enter (Georgia shelling Russian citizen civilians, Iraq use of chemical weapons on civilians), but the key is to have and rapidly implement an Exit strategy or it becomes untenable.

Real life may not to be about being right or wrong, it is about winning. So, what does a lawyer actually do to help you win?

Task 1. Establish. You start a project. It must be registered, may require permits, real estate, vehicles, hiring and registration of staff, a tax ID, maybe some offshores, taxation issues, visa support, etc. In Russia/CIS, of course you will need a permit, maybe even a permit to get a permit. Every law firm has a list of legal/regulatory stuff to get started.

The Establish tasks are straightforward, quantifiable and objective. You and your home counsel make a list of boxes, the onsite lawyer produces the checks for the boxes. You need a valid license to run a gaming product or to extract natural resources. Your lawyer gets you the stamp, signature, whatever or he doesnt. If you want to drill for oil and your lawyer cant get you a license, it doesnt mean that he is a bad guy, just that he is wrong for the project. With Establish tasks, a client should get a lot of tangible results, and very little in the way of story time. Not much should be left to the imagination. You are not really paying for your counsels ability to structure, plan and think. You are paying for mechanical tasks, the rates should be much better.

Psychologically, embarking on Establish tasks presents an entrepreneur with an opportunity to look inside himself. Are you morally prepared for the pure paynplay of a local lawyer in lets say Tomsk, who delivers results at a fraction (20-35%) of the cost of a Moscow law firm, but may also land you or (more likely) your general director in what the Russians call a place not so far away. Or do you want to pay a multiple and hire a major firm? It is certainly a much more congenial experience.

Establish is primarily for green field projects. Brown field projects such as M&A or other acquisition of a company to enter the market is much more closely linked to the Maintain tasks.

NOTE: The strongest possible recommendation is to never use local national (discussed in the next part) counsel for BOTH Establish tasks such as creating local and offshore legal entities and for Maintain tasks such as implementing tax and cash flow optimization. They build ships with multiple compartments, so that one hole cant sink the whole ship.

Task 2. Maintain. Once you entered the market, the tasks become much more difficult and far less quantifiable. Hiring staff is easy, firing is hard. Putting money in is much easier than getting money out. On one transaction a CIS nation insisted that the only way to repatriate profits was in local produce. One foreign investor spent several years writing angry letters and explaining that the whole world is watching. Not exactly. Another, took the cotton, sold it and from that day either doubled his profit margin or required prepayment offshore.

Generally, Maintain tasks come down to walking the transaction. They involve understanding how a project generates revenue and how to get that revenue into a useful currency and into an acceptable jurisdiction. Here, the type of counsel is crucial. A purely local firm generally cant do it, because the model is outside of their emotional landscape. A local law firm is usually unsurpassed in getting a zoning variance for a REIT, they cant keep one running. A major law firm typically finds the buying and selling of stuff a tad confusing and tawdry. A colleague who read a couple of these articles (rather tellingly) described them as I guess transactionally, they are useful, but all this transactional stuff is for shysters, we provide strategic guidance and structure projects.

Task 3. Exit. Here, the major law firms shine. A boutique can write your Eurobond, they can list your Eurobond, and if its under $100 million, they can even help you place it. Only a major can help place a billion dollar Eurobond. The market will not accept a billion dollar Eurobond written by somebody, somewhere, they want a major law firm. The boutique law firm of Heckle and Jeckle can list your AIM IPO for 200 million pounds, but you better be darn sure that you dont need their help to place it.

If you are looking to do a local sale for a business from $1 to 50 million, a local boutique can help you find a buyer. Only a major law firm Partner can access the Chairmen of several Fortune 500 companies to help you find $250+ million.

Purely local counsel can be downright harmful to your Exit strategy. Its a long discussion, and one that many readers will not agree with. In very short, if you have a local law firm in Tomsk, how likely are they to really want you to help leave Tomsk for forever and ever?

Next Part, types of onsite lawyers.

As always, questions and suggestions to pauljbacker@gmail.com.