An Interview with Lemin Yu, general manager of Sinochem

Winning the beauty parade – an interview with Lemin Yu, SINOCHEM Corporation

Lemin Yu, General Manager
Corporate Legal Department
Sinochem Corporation,

Beijing, China

Number of legal staff: 75 in total. Eleven in the corporate legal department.

Tell us a little about your background – how long have you been employed with Sinochem?

I have been with Sinochem for over 22 years. I assumed the position of deputy general manager of the legal department when it was spun off in 1995 as an independent department from the executive staff office and have been building the legal team since then. At that stage the company was facing a number of significant litigations involving derivatives and fraud and I was in charge of handling those, which provided a lot of valuable and interesting experience. That experience has certainly provided me with a heightened sense of how things could go wrong in the business world and increased sensitivity toward looking out for these issues. Since 2000 I have been actively engaged in cross-border M&A. I have been fortunate in learning from the corporate aspect, where skills are developed by learning what is the “correct” way to do business, and litigation, where there is much to learn from seeing how things can – and do – go wrong.

The Chinese economy has changed dramatically during your time with Sinochem. How has this played out for you? What political and economic factors have been at play?

I have seen the company go through a dramatic transformation throughout my career with Sinochem. For most of the Chinese state-owned enterprises (SOE) like Sinochem, the 1980s was a prosperous era when China opened its doors to the outside world and embarked on a process of reform. The 1990s, however, was a difficult and chaotic period for most Chinese SOEs as China went through a transformation from a central-planning economy to a market economy. Many SOEs – Sinochem in particular – suffered heavy losses during that period, owing to mismanagement and a lack of risk and credit control. These were somewhat unfamiliar concepts for SOEs’ management who had little experience of running a business in a market economy. When the Asian financial crisis hit China in 1997 to 1998, Sinochem was on the verge of bankruptcy. We were bailed out by the government, similar to what happened with western banks in 2008. A change in management at the senior level took place, followed by a series of moves traditionally seen in a corporate turnaround: a management consultancy was brought in, restructuring began, processes were streamlined, policies established, risk controls put in place and strategy was remapped. In effect, a new corporate system was installed. The company began to grow as a result, and has accelerated by over 20 per cent since 2004.

In terms of outbound investment, I think Chinese SOEs went through four different time frames: the 1980s; the 1990s; 2000 to 2008; and 2008 to the present. The 1980s was the “water testing period” where only a handful of SOEs, particularly those “window companies” (mainly state foreign trade companies) made outbound investment. This came about against a background of foreign trade companies – those SOEs with a monopoly on cross-border transactions but without domestic business franchise – that were compelled to look beyond China for investment opportunities, or “go international” as the catchword then was, and “domestic companies” – those with only domestic business franchise - that were largely confined to China in the form of a joint venture with western multinationals. I characterise this water testing period as the “dumb and daring era” when these “daring” SOE outbound investors saw opportunities but lacked in-depth understanding about the western legal regime, business practice, and the whole environ. In the 1990s, with the financial difficulties mentioned and no capability to look outside of China, there was very little M&A activity to speak of. Things changed significantly for Sinochem thereafter: 2000 to 2008 was a considerable growth period where large SOEs, including CNPC, Sinopec and CNOOC, started to look at M&A with initial focus on natural resources only. This has continued from 2008 to 2011, which has witnessed a huge, explosive growth in outbound investment, not only for Chinese SOEs but privately owned enterprises, as well as sovereign funds. As a result of the boom in the Chinese economy, the players are getting more complex and the deals larger. More and more SOEs have demonstrated a growing interest in M&A.

What have you enjoyed about your role as general counsel? Can you share some of the highlights of your career so far?

Going through these roller-coaster rides and living through all these events has certainly kept work very interesting! Back in mid-1990s when I was handling these messy litigations, one American attorney who was instructed by Sinochem then, used to tell me that the cases he had assisted us in handling were so unusual and intriguing for an American attorney that he could write a novel on each. There is a lot of satisfaction in getting to know the company inside out, what its objectives are and striving to obtain these in multiple jurisdictions. Managing cross-border issues is both challenging and rewarding, and an area in which a really valuable contribution can be made. I particularly enjoy that my role is not limited to legal matters. It’s more diverse, advising on business decisions and so forth. For me, that certainly brings more “job satisfaction”.

When I joined Sinochem, I was seconded to an operation working with US Agri-Chemicals Corporation, a phosphate fertiliser producer that the company acquired back in 1989. My close involvement in the daily management and the operations of both production and trading activities provided me with a unique opportunity to observe first-hand how a business is run in the west. There were only a handful of Chinese SOEs that explored M&A and in some ways, we felt like pioneers because foreign trade companies were a unique phenomenon in China at the time. When the import-export monopolywas lifted in the 1990s, SOEs experienced difficulties and only a few foreign trade companies survived. It was a very unique experience to be involved in, being part of the economic transformations underway in particular.

What are the biggest challenges of the role? How does life in-house differ from private practice?

Regulatory challenges are the most pressing. Some countries are quite apprehensive about Chinese investment, and both POE and SOE companies alike come under heavy scrutiny.

As an in-house lawyer, you are always looking at things from a heightened business dimension, in the context of the overall company direction. More and more Chinese and Indian companies are exploring opportunities in the sector and competition is fierce, which is driving up the price of assets, and natural resources in particular. Another challenge comes from the risks inherent in cross-border investment, particularly in developing countries where political stability and the rule of law might be an issue. It is quite ironic: in the 1980s and 1990s when foreign investment entered into China, we could not perceive or understand the concerns or worries of western multinationals over the transparency of government and predictability of laws in China. After sitting at the other side of the table as an investor, we suddenly have a feel for how important these issues are. I recall the company making an investment in a country a number of years ago, further to which, that government imposed a 99 per cent windfall tax after oil prices soared. There are always a host of issues to address and consider.

What percentage of your work is performed by in-house counsel? When and how do you instruct external advice?

We do the vast majority of the corporate work and instruct outside counsel for M&A transactions, large venture contacts, litigation and capital markets work. In making our outside counsel selections, we use a bidding process– a beauty contest of firms. We adopted the policy five to six years ago, and any engagement of external counsel worth over US$50,000 or 200,000 renminbi, must go through a bidding process whereby a minimum of three law firms are invited to tender an offer. We have done many in the past and have found these efforts to be very cost-effective.

When sending out an invitation to bid, we will ask firms to submit a capped-fee bid, based on a defined scope of the work. A panel comprising of members of our corporate legal department and the business unit will then jointly evaluate and compare price, terms and experiences of all bidding firms. We always use capped fees and require a staggered quote for each phase – how much for due diligence, how much for documentation and negotiation, how much for closing, and so on. We look to law firms to adopt the same commercial approach that we do.

How do you select firms to be on that original invite list?

Each is visited on a case by case basis and involves a number of considerations. Much depends on the nature of the deals, the governing law and where the asset is located. If, for example, the assets are located in three jurisdictions, then we do prefer firms with offices in those countries. We’ll use directories to source firms that have an expertise and established presence in the countries affected and investigate further from there. If there are multiple jurisdictions involved, we will look to instructing an international firm. If it is a specific deal in a specific country, then we would look for a national firm with an excellent reputation. If the project is in a developing country, but governed by a law in another jurisdiction, we would look to a leading firm from that governing jurisdiction.

What other matters come into consideration in your decision process?

Who you work with is incredibly important, particularly in local jurisdictions. We are very keen to know what specific deal experience the firm has, what kind of deals they have done and what lawyers will be handling the deals – who will be actually working on the file, and not just the billing partner. If we know a particular lawyer, then we would be keen to use them, otherwise, we will use the firm we believe has the best fit in terms of experience and expertise with our deal. A good reputation goes a long way here.

How important to you is an international network?

For energy and oil and gas matters, Latin America, Africa and the Middle East are significant jurisdictions for us. Firms that can provide a proven expertise in these areas do stand out, but it is not all about the ties that firms have. We’re able to use directories and pick and choose essentially. What we are certainly keen on is the level of recognised expertise that firms have in those jurisdictions and the direct experience they can offer.

A lot depends on the jurisdiction in which you are working. In the Middle East, we tend to start with international counsel. Litigation, however, is a different matter. Here, a good network and local knowledge on the ground can really make the difference, because it’s so area-specific. The same is true in China.

Interest in the Asia-Pacific has grown tremendously over the past few years with several firms opening offices in the region. How do you approach finding counsel in this region? Can you share any further industry observations?

There is a lot of competition for work in China and the market is already quite crowded. Most international firms have moved over to service their home clients and only a handful of these secure the instruction of Chinese companies. With most international transactions governed by UK or US law, those firms tend to fare well for work, but I’m not sure how financially successful these have been overall – I have heard that only a few find their China practice profitable.

Whether it is critical to open an office in the region depends on who your client is. If you are dealing with a less internationally experienced Chinese client, such as provincial-level SOEs or POEs, an office in China is a critical element in getting a mandate. But if you are dealing with a leading SOE, particularly those with a lot of outbound deal experience like Sinochem, presence in China is less critical. When looking to work in Australia, for example, we are looking for the magic circle law firms in that particular country. The depth of expertise available from national firms in Australia assists tremendously, especially when we need to engage a local law firm when bidding for a public company, for example.

How do you see the activity of Chinese companies playing out in the future? What trends do you expect to see?

Chinese companies and particularly SOEs are gaining more and more exposure to M&A and with that maturity, I think you will find a handful of leading Chinese state-owned enterprises emerge. Chinese companies are increasingly expanding toward the purchasing of not only natural resources but also brand names and technology. We expect further scrutiny from authorities and as a result will require more regulatory advice from external counsel as well as PR or GR services. Leading Chinese companies have been building up their in-house deal teams and while some smaller SOEs and POEs still have a long way to go, I think we will see that trend continue.

The other trend that can be seen is for international lawyers with a Chinese background, who have been educated in western countries and practised with international firms, to leave those global practices and set up their own in China. Owing to their smaller size, they are able to offer a competitive price and their ease in communication and culture provide an attractive offering for smaller SOEs and POEs on outbound deals.