The reported plight of Australian casino operator Donaco at the hands of the vendor of one of its main assets highlights the risks associated with investing in countries where the rule of law is scarce and corruption is rife.

Donaco's disclosed problems in the Cambodian border town of Poipet (See - Article) show how foreign companies can often end up in cascading legal problems when Asia ventures involving local operators turn sour.

While it may appear sensible on paper to purchase a business in a foreign country and then provide incentives to the local party to continue to operate it on your behalf, what often occurs is the local party continues to treat the business as their own - regarding the purchase price as a windfall gain. I often refer to this as the absent owner syndrome where foreign companies expect levels of governance and adherence to contract terms that they would find in their home countries.

Where the business being purchased is a significant player in an industry and country known for corrupt practices, it is likely that the local party has significant political connections. Any foreign company hoping to succeed would need equivalent or superior political connections which may fall foul of their home country's foreign corrupt practices regime. Seeking to rely on the local party's political connections increases the risk that those connections may be used against the foreign party in the event of a dispute.

Where disputes arise, foreign companies can expect several things, some of which seem evident in the Donaco example.

First, do not expect non-compete terms to be very helpful. In some parts of Asia, they are rarely enforced or are enforced in only limited respects. Often, the damage has been done before the foreign company either notices something has happened or is able to take any action.

Where, due to local laws or other reasons, the vendor retains control over the land on which the business is situated, expect unreasonable attempts to interfere with the foreign company's rights. This can include wrongful termination of any leasehold interest, cutting off all access or cutting off electricity and water. Where possible, ventures should be located on land independent of the local party where the foreigner is legally entitled to exercise control. While not feasible in all cases, anything less than freehold control increases the risk of adverse action in the event of a dispute.

Expect counter attacks. On multiple fronts. Defamation proceedings are often used as a weapon in any dispute or negotiation. Where defamation in particular countries constitutes a criminal offence, criminal proceedings may be brought against the foreign company's directors or local foreign representatives. Such action may mean foreign directors have to avoid visiting the jurisdiction until the matter is resolved. For local foreign representatives, it may mean lengthy meetings with lawyers and court proceedings which dilute the time available to deal with the main dispute. Laws such as Thailand's Computer Crime Act can be used to great effect to distract and derail a foreign company's attempts to deal with the original dispute. Even local work permit laws can be used as a weapon to harass local foreign representatives or foreign company directors visiting for negotiation purposes.

By forcing the foreign company to battle legal proceedings and harassment on multiple fronts, the local party may hope to reach a point where the foreign party will do almost anything just to resolve the dispute. It is at that point that the local party may be willing to negotiate a resolution. In some cases, this involves the foreign party virtually giving the business back to the local party and writing off the whole experience. An exception is where the local party considers a loss of face is involved. In such a case, there may be no prospect of negotiation at all.

While there is always the possibility of stellar investment returns in parts of Asia, foreign companies need to enter negotiations with their eyes open to the risks which are inherent in this region. A failure to do so can cost the company's shareholders dearly.

This article highlights the general risks to foreign investors investing in Asia. It uses the recent disclosures by Donaco Ltd to highlight those risks. Neither PELEN nor Edward Dever are involved in the matters involving Donaco Ltd.

PELEN

February 2019

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.