There is an old saying that a small amount of legal knowledge is a dangerous thing. Worse still is no legal knowledge at all. Any lawyer with exposure to Asia business transactions and work with companies based in Asia can provide examples of legal documents prepared or modified by non-lawyers that are, at best, unenforceable and, at worst, create significant potential liabilities.

At one point, I was working with part of a conglomerate in Asia. One of their previous marketing campaigns came across my desk. The marketing team had created a high-profile advertising campaign for their new product around a Hollywood action star’s image and the name of one of his famous movie franchises. Obtaining consent for use of the star’s image and to appropriate the movie franchise’s iconic name seemed to have escaped the attention of the marketing team and management. No one had thought to consult either internal or external lawyers. Fortunately, the misuse of the image and name also escaped the attention of the Hollywood studio and the campaign never again saw the light of day.

In any due diligence exercise in Asia, one of the more important questions to ask, and one that is rarely asked in transactions involving small to mid-sized targets, is who does the target company's legal work? Often, these companies may regard themselves as too small to hire in-house legal counsel and budget considerations limit their use of outside counsel. In these circumstances, it falls to management to resolve legal issues and deal with contract issues. Although attitudes are changing, many companies in parts of Asia simply do not see the need for lawyer involvement in transaction work and other issues.

A prime risk of non-lawyers engaging in legal work is that there may be hidden risks in contracts where management has not fully appreciated the legal implications of certain provisions in a contract and has agreed to provisions which are not in the company's best interests and which may come back to haunt any buyer. Examining material contracts in detail is a crucial part of any due diligence.

Contract provisions which may have been effective at one point in time may now be outdated given changes to the law. Non-lawyers may not be up to date with recent local and international legal developments which may affect liability under contracts or their enforceability. This is particularly true of day-to-day documents such as employment agreements and standardised sales contracts. Often, these are rarely updated or may be changed on a piecemeal basis without considering the implication of such changes on the rest of the contract. This may create inconsistencies or affect the contract’s enforceability.

A further risk to companies and to any buyer is regulatory compliance failure. While many companies in Asia have government affairs teams to deal with regulatory issues, they are often more focused on personal relationships with government departments to improve efficiency of government dealings. There is a significant compliance risk of using non-lawyers for regulatory issues. Regulatory compliance failures expose the company, its directors and management to potential civil and criminal penalties. While representations and warranties under a purchase agreement may afford financial recourse to a buyer for any such failures, the buyer will still need to remedy the failures and implement systems to ensure future compliance.

Ultimately, companies need to balance the cost of using external legal counsel or employing in-house legal counsel against the liability risk of problems occurring if management is reliant on its own resources to resolve legal issues.

PELEN

August 2018

The content of this publication is intended to provide a general overview on matters which may be of interest. It is not intended to be comprehensive. It does not constitute advice in relation to particular circumstances nor does it constitute the provision of legal services, legal advice or financial product advice.