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Although attorneys disagree about how much damage was done to their firms’ China operations by the failure of CNOOC to purchase Unocal Corp., the scrapped acquisition is providing them with lessons about the delicate balance of law and politics required in big deals with China. Some lawyers are predicting dire consequences from the decision by CNOOC, the China National Offshore Oil Corp., to pull out of an $18.5 billion cash bid to buy the California oil company after the potential sale became embroiled in political controversy. Others say the unique factors in the deal — a company largely owned by the Chinese government bidding for a U.S. oil company at a time of skyrocketing energy prices — make the problems encountered peculiar to it. It may take months to see what China’s next move will be, but getting the big business many law firms are banking on from China may become trickier than expected. Wilmer Cutler Pickering Hale and Dorr partner Charlene Barshefsky said she is “very concerned” about China’s reaction and the fallout globally from the failed deal. Barshefsky, the U.S. trade representative from 1997 to 2001 who negotiated China’s entry into the World Trade Organization, represented investment banks and hedge funds involved in CNOOC’s bid. Efforts by Congress to stall the transaction, she said, could undermine years of work the United States has done to make sure investors from this country are treated fairly when seeking foreign investments. And since most of the U.S.-China transactions involve U.S. investors buying instead of selling, it could get messy. “It has been a hard-fought issue for U.S. investors,” Barshefsky said. The CNOOC situation shows that it is critical for U.S. firms to have attorneys involved in China deals who know Washington and can navigate in the political briar patch, she said. “What we will see is that most successful practices in China are those that have superb legal skills and superb government relations and public skills,” she said. Fred Bartelsmeyer, head of Bryan Cave’s offices in Hong Kong and Shanghai, expects firms to evaluate their China practices to determine if they have in place people who can handle the political issues. “You have be engaged politically as well as legally in assisting your client,” he said. “Law firms can learn from this for future matters.” China, with the world’s seventh-largest economy, has become a significant market for dozens of U.S. law firms, especially since its entry into the WTO in 2001. Many of the nation’s biggest firms have offices in Hong Kong, Beijing and Shanghai. And a growing number of shops outside the megafirm category — including Bryan Cave; Wilson Sonsini Goodrich & Rosati; and Baker & Daniels — have offices there vying for business as well. Despite the concern of some firms about the implications of CNOOC’s decision to withdraw, others see it as but a hitch in a market destined to grow. Heller Ehrman partner James Olson said the confluence of factors specific to the CNOOC deal makes it unlikely that the parties in other China transactions will face the same degree of problems that arose in the oil company deal. Since 2003, Heller Ehrman’s China practices in Hong Kong and Beijing have grown from three to 40 lawyers. The United States is a “natural market” for China, Olson said, adding that the CNOOC deal is unlikely to be a major deterrent to China’s advancement into the world economy. Olson, who is not involved in the Unocal matter, also said that, politics aside, CNOOC’s bid appeared sound. “If the transaction was analyzed on its merits, it might not have been so controversial,” he said. Still, some see CNOOC’s failure to woo Unocal as a sign of growing difficulties China may have in expanding into the global market, and that could mean a more difficult job for law firms seeking transactional work with the country. “Chinese companies will have to tread very carefully in the U.S. until the U.S. government makes clear its intention toward Chinese investment,” said Akin Gump Strauss Hauer & Feld partner Daniel Spiegel. CNOOC hired Akin Gump to handle some of the matters in the deal. Spiegel said that although CNOOC tried to play by the U.S. rules, in part by seeking an expedited review of the acquisition by the Committee on Foreign Investments in the United States, an interagency panel of U.S. officials, China was “treated differently” from other investors. “In capital markets, that’s not a good precedent,” he said. SOME HARD FEELINGS CNOOC’s Aug. 2 press release issued after it pulled out of the deal indicates some hard feelings on China’s part. “The unprecedented political opposition that followed the announcement of our proposed transaction … was regrettable and unjustified,” the release said. The bid by CNOOC represents the largest by a Chinese company to buy an American firm. CNOOC, 70 percent owned by China’s Communist government, formally offered to buy Unocal in June for $18.5 billion in cash following Chevron’s bid in April for $16.7 billion in cash and stock. Also in June, CNOOC asked for an expedited review by the Committee on Foreign Investments, which analyzes the national security implications of U.S. purchases proposed by foreign entities. Chevron then increased its bid to $17 billion, which was followed by a resolution from U.S. lawmakers calling for administrative review of the deal. But what appeared to be the deal-breaker for CNOOC was a provision inserted into an energy bill in July that would have delayed the acquisition for at least four months. Congressmen from California and other lawmakers had expressed concerns about national security in letting a Communist government with human rights and religious-freedom violations take over a major U.S. oil company.

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