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In today¡¯s intricate business landscape, public-private collaborations have emerged as a critical pillar of corporate strategic planning. Leveraging their policymaking, resource-allocating and market-steering capabilities, governments and state-owned players are attracting private enterprises seeking mutually beneficial partnerships. Yet this collaborative model, while offering opportunities, also carries significant risks. Without maintaining rational trust, enterprises risk being trapped in legal complexities, which pose grave challenges to their survival and growth.

More effective than blind faith, rational trust is a rigorous, meticulous approach in which enterprises address every collaborative detail, and assess and mitigate risks in strict adherence to legal and regulatory frameworks while fully recognising the credibility and resource advantages of governments and state-owned entities. Drawing on real-world case studies, this article explores the vital importance of maintaining rational trust in public-private collaboration and discusses risk-mitigation strategies to offer enterprises actionable inspiration and guidance.

Due diligence

Around 2015, a private enterprise, on learning about a new land planning policy from a government department, hastily signed a land lease contract with the local village committee. The plan was to build a retirement community and a film studio on the leased land, with part of the land subleased to a third party.

However, the government authorities failed to fulfil their promise of changing the land use designation, leading to the project buildings being declared illegal and demolished. Thus, the contract fell through. As the case was reported to the police by the third party, the enterprise¡¯s actual controller was detained on suspicion of contract fraud.

As the defence counsel in this case, our firm¡¯s lawyers found out that the enterprise had never conducted due diligence on the land in question, which was a fatal error in running the project.

Neither had it cautiously verified the land¡¯s actual status, and the authenticity of the government¡¯s promise. Nor had it ever checked the legal authority of the entity making the promise. Crucially, it neglected a comprehensive review of the contract from the perspective of criminal and administrative compliance. Such malpractice ultimately exposed the enterprise to criminal risks.

This case underscores the importance of conducting effective due diligence before commencing a project, as it helps build a solid foundation for collaboration, and to ensure smooth project progress. Had the enterprise conducted due diligence, it could have identified the risks without falling into the criminal quagmire.

Preserving collaboration evidence

A prominent local private enterprise responded enthusiastically to the government¡¯s investment promotion by establishing a factory on agricultural land. Despite government assurances of a prompt land designation change and repeated urgings to begin construction, the issue remained unresolved after more than 10 years of operation. Consequently, the company¡¯s actual controller and senior executives were investigated for allegedly illegally occupying agricultural land.

On taking on the case, our firm¡¯s lawyers identified that the company actually had an in-house legal department and had retained some external legal consultants with certain contract review proficiency in its routine commercial transactions. However, its compliance efforts were severely imbalanced, concentrating too much on civil and commercial rights protection while neglecting criminal and administrative compliance imperatives.

Most critically, the company had failed to properly retain evidence of its communications with government bodies about their instructions to the company to commence construction, and their pledges to alter the land use designation. This error became an immense barrier in the defence process, rendering the relevant individuals severely disadvantaged in the face of criminal charges.

This case demonstrates the value of properly retaining collaboration evidence in protecting a company¡¯s legal rights. Timely preservation of relevant records could have provided strong support in the legal disputes, preventing the company from being compromised.

Partner scrutiny, contingency plans

In a financial case represented by our firm, the company involved is an internet business that leveraged its platform to collaborate with a major state-owned bank. It facilitated small consumer loans by managing borrower information and handling funds transfers.

During the collaboration, the company¡¯s actual controller, one Mr Fang, was charged with illegal business operations and usurious loan relending. The long-term stable co-operation and the substantial loan amounts resulted in a case involving RMB600 million (USD82.5 million), with serious implications.

Our lawyers¡¯ thorough investigation revealed significant non-compliance in the bank¡¯s lending and recovery processes, indirectly misleading the case investigators. Excessively trusting the bank¡¯s state-owned status, the company failed to scrutinise its compliance in ignorance of potential criminal risks.

Additionally, the company had no contingency plans. As the actual controller was detained, the employees destroyed records in a panic, leading to essential evidence shortfalls that markedly impeded the case.

This case reveals the essential need for enterprises to conduct compliance scrutiny of their partners, such as governments and state-owned entities, with robust contingency plans developed. By proactively examining its partner¡¯s compliance and establishing a contingency mechanism, the company could have averted criminal risks and facilitated the progress of the case.

Key takeaways

Although our lawyers¡¯ efforts ultimately resolved the criminal risks in the above-mentioned matters, the prolonged involvement in criminal cases substantially impeded the enterprises¡¯ operations and the individuals¡¯ personal development.

These cases clearly illustrate the importance of maintaining rational trust in public-private partnerships. Rational trust entails conducting comprehensive due diligence before collaboration, prioritising evidence preservation and management along the way, and having robust contingency plans to address emerging risks.

This approach enables companies to build strong foundations for sustainable development, achieve stable growth in public-private collaborations and mitigate possible legal risks.

Wang Weining is a founding partner and Li Rujia is an associate at Starrise Law Firm.