Starting With the Law in China

China Business Laws - 星期三, 5月 30, 2012 22:48 - 0 Comments

- Carson Block, China Primer
When considering establishing an operation in China, your first step should be researching the applicable legal framework. China’s economy is tightly-regulated – particularly with respect to foreign investment. Not infrequently, foreign investors find that because they are foreign investors, there are prohibitions or restrictions that apply to their industry that have a material impact on how they structure their plans for doing business in China. For this reason, you should find out what you may do before spending too many resources developing your business plan.
Start With the Foreign Investment Catalog

The first place to start is the foreign investment catalog (officially, the “Catalogue Guiding Foreign Investment in Industry”). The foreign investment catalog breaks industries down into three categories: Prohibited, Restricted, and Encouraged.

Prohibited industries are those in which foreign investors may not invest.

Restricted industries do not freely allow foreign investment. The restrictions typically require foreign investors to joint venture with a Chinese company (usually with a cap on how much equity the foreign party may own) and / or impose minimum capitalization requirements.

Encouraged industries are those for which the government in most interested in receiving foreign investment. There are usually tax incentives available for investment in encouraged industries. Encouraged industries are typically high technology-related and “green” industries.

Industries that are not classified into any of the three categories are generally assumed to be permitted, but without special incentives.

Create the “Business Scope”

Every company in China must have a “business scope” that explicitly states what it does. Companies may not operate outside of their business scopes, and the penalties for doing so may be severe. The authorities must approve each company’s business scope, and it is not unusual to have to revise the proposed business scope at least once. The business scope is relevant to the foreign investment catalog because investors may find that their proposed business could fit within one or more categories of the catalog, depending on how they word the business scopes. Therefore, investors may from time to time be able to massage the business scope in order to obtain more favorable classification.

Understand the Chinese Laws Governing Your Foreign Investment

After understanding where your proposed investment stands vis-à-vis the catalog, it is worthwhile to consider the laws governing the type of company you are considering: a wholly foreign-owned enterprise (“WFOE”) or a Sino-foreign joint venture (“JV”). Chinese laws work somewhat differently than you may be used to. There is a WFOE law, two Sino-foreign JV laws (one for “equity” JVs and one for “contractual / cooperative” JVs), and a company law, among many. However, many of the laws are vague and rely on “implementing regulations” to explain how they should be applied. In the Chinese system, the WFOE or particular Sino-foreign JV law (and their implementing regulations) will be controlling in the hierarchy, then the company law, and then other regulations. (This is a greatly simplified hierarchy, as investors often quickly find out when they start to learn about the maze of conflicting regulations and even laws that affect their plans.)

Involve a China Attorney Early On

In many cases, it is highly advisable to involve an experienced attorney in China early in the planning process. It is a good idea to familiarize yourself with the catalog and the laws mentioned here, but without experience in China, it can be difficult to interpret the information. Below are links to the documents mentioned above:

FDI Catalog
WFOE Law
WFOE Implementing Rules
CJV Law
CJV Implementing Rules
EJV Law
EJV Implementing Rules

Choosing the Right Forum for Business Disputes in China

China Business Laws - 星期三, 5月 30, 2012 22:42 - 0 Comments

- Dr. Lefan Gong, Zhonglun Law Firm

In cross border transactions, it is not uncommon for parties to struggle over the dispute resolution clause. However, these negotiations often miss the important points. Some counsels are inclined to select forums that are more familiar to themselves; others insist on choosing locations that appear “neutral” to all parties (i.e., Switzerland). In neither situation is counsel adequately considering the ultimate enforceability of rights, timing and convenience of the dispute resolution process.

Drafters of commercial agreements should consider the following true story: A joint venture company in Shanghai (the “JV”) owed a significant amount of account payables to each of a Chinese domestic company (the “China Co.”) and a multinational corporation (the “MNC”). The sales agreement with the China Co. choose the CIETAC in Shenzhen for dispute resolution, while the agreement with the MNC selected Singapore as the arbitration venue.

The China Co. filed the claim first, and then successfully sought a prejudgment remedy from the local court in Shanghai by attaching the JV’s primary bank account. After having learned of the attachment, the MNC initiated arbitration in Singapore. However, the MNC soon learned that its Singapore dispute resolution process would take much longer than the China Co’s CIETAC arbitration. Moreover, because China law does not allow prejudgment attachment when arbitration is to be conducted outside of the PRC, the MNC was unable to attach any assets.

CIETAC in Shenzhen quickly reached an award in the China Co’s favor. After the China Co enforced the award, the JV was left with an amount of cash that was less than one quarter of the amount the MNC was seeking. The MNC’s only hope of obtaining full satisfaction would be to force the JV into bankruptcy. However, involuntary bankruptcy is difficult for a creditor to initiate in China, and the process allows other creditors to come forward with possibly competing claims.

If the MNC’s counsel had a little more foresight in selecting the right forum for their dispute resolution in China, the MNC could have wound up in a much better situation. Unfortunately, in preparing China-related dispute resolution clauses, there are many myths about the process that make such mistakes common when doing business in China. In most cases, these myths are supported by compelling logic; however, believing in these forum selection myths may cause you to make costly mistakes.

Myth #1 – Convenience is Paramount

Most drafters hopefully resist the temptation to choose a forum based on what is convenient for them (although the large number of New York-based resolution clauses calls this assumption into question).

When considering forums, drafters should try to envision what types of disputes would likely arise, and in what forms. Then, they should compare the pros and cons of a given forum in each situation.

Counsel should give special consideration to the following issues:

Whether the assets concerned are largely located in China?

In what forums would key witnesses be most readily available?

Might prejudgment relief be important?

How might the risk of each particular forum jeopardize your client’s interests?

Myth #2 – Anywhere but China
Perhaps out of fears of bias, foreign companies tend to try to avoid CIETAC and other Chinese arbitration commissions; while Chinese companies often prefer China forums. Often after excruciating negotiations, parties meet in the middle and choose a “neutral” location for dispute resolution, such as Singapore.

Lawyers should carefully consider the procedural advantages and disadvantages of conducting arbitration overseas. As shown in the real case above, Chinese arbitration can offer a significant procedural advantage by allowing the plaintiff’s to obtain prejudgment attachments.

A new judicial cooperation agreement between Mainland China and the Hong Kong SAR recently entered into force. Under the agreement, a petition for prejudgment relief by a Hong Kong arbitration tribunal may be entertained by Chinese courts; however, this is yet to be tested in practice.

Myth #3 – Binding Arbitration Agreements are Always Enforceable

Properly executed binding arbitration agreements are enforceable; however, procedural defects may void an arbitration agreement. A common mistake is plugging in boilerplate dispute resolution language without review. It is not that uncommon for such boilerplate language to violate the law, given the circumstances in which it is used.

For instance, PRC law provides that parties may select foreign arbitration if the agreement involves one or more foreign factors, such as party and performance of the contract. Some courts in China might refuse to enforce arbitration rulings from foreign panels if they deem the subject matters to be entirely domestic and without the presence of any foreign factors. As a result, if a domestic Chinese company enters into a contract with a Sino-foreign joint venture company (which is considered to also be a Chinese company), and the agreement does not have other foreign factors, the choice of a non-Chinese arbitration could be subject to court challenge in China.

Other considerations include the selection of choice of law. China requires certain matters, such as disputes relating to Sino-foreign joint ventures, to be governed by the PRC law. Violating this law may also render the clause and the resulting arbitral award unenforceable.

Beyond enforcing the arbitration awards, another important consideration for enforcement is how to build mechanisms into the agreements to allow for quick and effective protection of clients’ interests, such as injunctive relief and prejudgment remedies. This is related to the myth #4 below.

Myth #4 – Arbitration and Court Relief Are Mutually Exclusive
At first glance, it is true that a valid binding arbitration clause proscribes court adjudication and arbitration when disputes arises. However, there are important exceptions to the rule. A valid arbitration clause does not prevent the parties from being able to seek injunctive relief, which is an important form of recourse when the dispute involves intellectual property, and the damages may be imminent and irreparable.

It is therefore important to allow for injunctive relief and similar remedies in the agreements aside from the arbitration clause. In a situation where a U.S. company’s intellectual property rights are at stake, the drafter may consider including language to allow parties to seek injunctive relief in both U.S. and PRC courts.

The mistakes or misconceptions discussed above are not uncommon in cross border transactions. However, prudence dictates that drafters do not blindly use boilerplate language. For good measure, they are well-advised to draft the agreements with the view to being able to effectively enforce them when necessary. Relative to the future litigation costs and expenses that could otherwise be saved, such cautionary measures are worth the time and effort.

Lefan Gong is a Partner in the Shanghai office of Zhong Lun Law Firm. He has advised large multinational and U.S. Fortune 500 companies and other clients in a wide range of transactions, including cross-border mergers and acquisitions, private equity deals, venture investments, joint ventures, and inward investments in China. A frequent author on China law-related topics, he is admitted to practice in New York and in China. He received Science Juris Doctor and LL.M. from the University of Michigan Law School.

Housing permits, starts hit record lows

Resources on Business with China - 星期四, 12月 25, 2008 22:58 - 1 Comment

Housing permits and starts fell to record lows in November, the government said Tuesday, in the latest sign that the housing market is continuing its decline.

Housing permits fell more than 15% to an annual rate of 616,000 last month, the Commerce Department said, while starts slid nearly 19% to an annual rate of 625,000.

“[Housing permits and starts] are startlingly low and really underscore the degree to which builders are cutting back aggressively on construction,” said Mike Larson, a real estate analyst for the Weiss Group. “We still have too many homes for sale on the market.”

The reports were much lower than expected.

The Commerce Department was expected to report an annual rate of 700,000 building permits for November, according to a consensus of opinion compiled by Briefing.com.

Permits, which can be a useful indicator to gauge the near future of the housing market, reached a 730,000 rate in October, the lowest level since March 1975.

Housing starts were expected to come in at an annual rate of 730,000 for November, according to economist consensus from Briefing.com.

That’s down from 771,000 during the prior month. The new annual rate for starts was the lowest since the department began tracking the data in 1959, and was down about 50% from the 2005 peak.

Paul Kasriel, director of economic research at Northern Trust, said he expects the housing construction market to bottom out sometime next year, though he admitted that the declines have already exceeded his initial expectations.

“We still have an excess supply of houses, both existing and new,” said Kasriel. “In all candor, I’m surprised – with all the excess supply – that we’ve been building any [new houses].”

While the declines in construction are painful for the economy, Larson of the Weiss Group said it is the only way to work through the excessive supply.

“Arguably, these dismal numbers are what we need to see to get housing inventories back in line with the reduced level of demand out there,” said Larson.

Seller’s remorse

Resources on Business with China - 星期四, 12月 25, 2008 22:57 - 0 Comments

I launched SysOpt.com as a hobby business back when I was in high school. It was a community for tech-savvy people looking for tips to make their computers run faster.

Around the same time, in the early 1990s, I launched ResellerRatings.com to help consumers identify safe shopping sites. Advertising sales for the two Web sites were earning me an annual profit of $100,000 from my senior year of high school through my sophomore year of college, at which point I dropped out to pursue the businesses full time.

Out of the blue in 1999, an IT-industry Web site called Andover.net offered me hundreds of thousands of dollars to buy SysOpt and ResellerRatings. I was a 20-year-old with dollar signs in my eyes, and I was ecstatic.

To make sure my company was being valued properly, I approached an Andover competitor, EarthWeb, and asked it to name a price for my site. I didn’t know how to pit Andover against EarthWeb so I told each party what the other’s offer was. Obviously I should have kept that information to myself and just let them keep bidding higher. But in the end EarthWeb won by doubling its initial offer to around $4 million. The buyout was half in stock and cash and half through a structured earn-out based on the growth of SysOpt’s page views.

But even though I had spent many stressful months negotiating the sale agreement with the help of a lawyer, the transaction was flawed. I had never sold a company or dealt with that kind of money before, and I was in way over my head.

In the months after the sale, I thought I was set for life. After I got the initial cash payment, I began spending recklessly.

I bought a $65,000 Porsche Boxster and an $11,000 piano. I have never taken piano lessons and can’t read music, but I discovered a new talent when I learned to play Beethoven’s “Moonlight Sonata” by ear. I also rented a $4,500-a-month house in Sausalito, Calif. for 10 months and let a money manager invest my funds in risky telecom stocks, which were hot at the time.

Unfortunately for me, the EarthWeb deal started to fall apart just a few months later. Remember, I agreed to accept part of the sale price in EarthWeb stock. Initially I thought that was a great idea because the stock was going up. But the deal stipulated that I couldn’t sell my shares for at least a year. By that time, EarthWeb’s stock had tanked and was almost worthless.

The structured earn-out plan based on traffic growth turned out to be a nightmare as well. When EarthWeb decided to sell its online business (to Internet.com), support for my Websites was cut and I was laid off, which obviously made it impossible to meet the traffic goals that I needed to realize the earn-out.

I was left with only 40% of the money that I’d originally expected from the deal. I blew some of that dough on extravagant purchases, but most of it evaporated in the dot-com bust. In the end, I realized only 10% of the original sale price for my two sites.

I’m an entrepreneur, and when my back is against the wall I go into survival mode. I took EarthWeb to court to dispute the earn-out portion of the transaction. It turned out that EarthWeb was missing months of traffic data. The discovery process turned up internal e-mails suggesting that EarthWeb knew its data were inaccurate. The arbitrator found that EarthWeb did not maintain good traffic records, hadn’t supported my sites properly and had violated the earn-out agreement by off-loading SysOpt and ResellerRatings to Internet.com. I was awarded a cash settlement of $628,000.

Next, I fired my money manager and boned up on finance so that I could oversee my own portfolio. I created a SEP IRA account and started saving 50% of my income every month.

In 2003, Internet.com decided to shut down ResellerRatings. I seized the opportunity to buy the site back for less than $50,000, and I successfully relaunched ResellerRatings. Since then, I’ve started three more Web companies and am posting about $2 million in annual sales with the help of five full-time employees.

Over the years I’ve fielded several offers from buyers interested in purchasing our various sites. Next time I sell a company, I’ll do it right. I now understand the pitfalls of accepting stock and agreeing to earn-outs. (Trust me on this one: Earn-outs are risky and should never be more than 50% of the deal.) I understand what language belongs in a sales agreement, and I have a great attorney. I’m working for myself again and putting money away to secure my financial future.

That first deal? Let’s just call it a learning experience.

Energy industry braces for Obama

Resources on Business with China - 星期四, 12月 25, 2008 22:56 - 0 Comments

Despite praising it publicly, the energy industry is wary of President-elect Barack Obama’s incoming energy team which will likely call for major changes in the country’s energy plan.

When Barack Obama announced his energy and environmental staff last week, the industry nearly tripped over itself lauding the new picks.

“Obama has carefully chosen an impressive team of experienced and capable leaders,” wrote Tom Kuhn, head of the utility trade group Edison Electric Institute.

“Dr. Chu is an internationally renowned physicist … acclaimed for his technical competence,” the Nuclear Energy Institute’s Marvin Fertel wrote about incoming Energy Secretary Steven Chu.

Even Big Oil was cordial. The American Petroleum Institute issued a statement saying it “looks forward to working with President-elect Barack Obama’s appointees to develop a comprehensive, fact-based and realistic energy policy.”

But unlike President Bush, Obama hasn’t put a single person from the fossil fuel industry on his energy team.

Energy Secretary nominee Chu is a physicist and former Berkeley professor. Lisa Jackson, Obama’s pick for the Environmental Protection Agency, and Nancy Sutley, his choice to head Council on Environmental Quality, have long resumes as regulators. And Carol Browner, tapped for the newly created office overseeing energy and climate issues, is a longtime Washington operator who Sen. James Inhofe, R-Okla., called “a proud liberal who has long-advocated an environmentalist agenda.”

Everyone on the team wants to cap greenhouse gases – a costly proposition for a country that uses fossil fuel for 85% of its energy – and move to more renewable sources of fuel.

So what does the industry really think of Obama’s new team, and who stands to lose the most?
Coal in the crosshair

The energy industry is varied, with sectors having different takes on the incoming administration.

The renewable industry will likely do well since any mandatory cap on carbon will drive up the cost of competing fuels while a federal mandate to purchase alternative power would provide a ready market.

The coal sector will likely have the hardest time with Obama’s energy regulators.

Coal is cheap and abundant in the United States. It provides about 50% of the nation’s electricity.

But it’s dirty, emitting more carbon dioxide per unit than any other widely used fuel. Technologies to make it cleaner – such as gasifying it or capturing the carbon dioxide and burying it underground – are expensive and, in the case of capture, untested on a large scale.

Moreover, Chu has called coal his “worst nightmare” because of its heavy carbon footprint.

“The target this time around is coal,” said Christopher Ruppel, an energy analyst at Execution LLC, a brokerage and research firm for institutional investors like hedge and mutual funds. “The consensus is this administration does not want any new coal plants.”

Ruppel was quick to say that Obama’s incoming team – despite the saber rattling from Sen. Inhofe – likely won’t take drastic steps, like passing carbon restrictions that are too tight or too fast, or directing the EPA to clamp down on coal plants.

“These are very pragmatic regulators,” Ruppel said. “They realize the country is in an economic crisis, and they don’t want to put these industries into a tailspin.”

Others think the new administration will be even more lax. The nation needs to fill a growing need for electricity and, next to conservation, coal is the cheapest option.

Throw in the sharp recession and the power of coal-state senators, and many people think the Obama administration is going to find itself with very few choices.

“In the near term, there’s not going to much of a change in the energy policy of the U.S.,” said Lasan Johong, a utility analyst at RBC Capital Markets. “The overwhelming concern is the economy. Everything [Obama] wants to do costs money, and that has to come out of the pocket of consumers.”

With the economy weak, the coal industry remains upbeat that it will continue to play a big role in the nation’s power mix.

“The important thing is to look at their policy directions, including building and maintaining jobs,” said Carol Raulston, a spokeswoman for National Mining Association. “We think coal will play and important role in that.”

The coal mining industry directly or indirectly employs more than 500,000 people, according to the mining association.
Nuclear energy, oil in muddy waters

During the presidential campaign, it was Obama’s Republican rival, John McCain, who was nuclear’s big booster. McCain wanted to build 50 new plants.

Obama didn’t say much on the subject – acknowledging that nuclear has a role but pointing out its high costs and waste issues.

He and his team haven’t been clear about where they stand since winning the White House, but it’s generally thought that they will at least not get in the way of new nuclear plants.

Officials for Obama did not immediately return a call seeking comment.

Chu is a physicist, and his most recent job was head of the Lawrence Berkeley National Lab, which got its start as one of the government’s main nuclear research facilities and still does a lot of unclassified radiation and nuclear fusion research.

The nuclear industry has high hopes. It notes that Chu, along with other national energy lab heads, signed a paper last summer saying nuclear power “‘must play a significant and growing role in our nation’s – and the world’s – energy portfolio.”

The oil industry is said to be more concerned.

During the campaign, Obama promised a windfall profits tax whenever crude prices crossed $80 a barrel. And Browner, during her days as head of President Clinton’s EPA, imposed costly clean air regulations on the refining industry.

“Browner was a forceful administrator,” said John Kilduff, an oil analyst at MF Global in New York. “The industry was concerned then, and they will be concerned again.”

But with many of the clean fuel regulations already implemented, and Browner’s attention turning to coal, the oil industry may escape relatively unharmed.

Falling oil prices have, for the time being, taken windfall profits tax off the table and also dampened the calls for more domestic drilling, although Obama has said he’s open to more drilling in combination with a comprehensive energy plan that moves the country away from fossil fuel.

Big Oil may suffer a few setbacks by losing some tax breaks, but they also may get to drill in more parts of the country. All in all, they seem to be out of the spotlight, for now.
Natural gas, conservation, renewables rejoice

If a law capping carbon dioxide emissions is passed, conservation, renewables and natural gas stand to benefit the most.

The natural gas sector will gain in the short run. It burns much cleaner than coal and can provide power on a scale that current renewable projects could not meet.

The renewables field, obviously, benefits as companies and utilities will buy clean power in an environment where they can only emit so much carbon dioxide.

And companies that focus on energy efficiency – often units of larger conglomerates like Johnson Controls, Honeywell or General Electric – are seen as playing a central role under team Obama.

Kevin Book, a senior energy analyst at the investment bank Friedman, Billings, Ramsey, said the Obama long-term energy plan has been described to him roughly as such:

* Renewables like wind and solar will begin to displace coal from the electricity generating market, with solar panels mounted on the roofs of nearly all big buildings.
* Electric cars will become widespread, and car batteries will be used to store excess electricity or as a source for more electricity when it’s needed. A computerized electrical grid will handle the electric flow, drawing it from batteries to buildings, or vice versa, when needed.
* But before any of this can happen, the nation needs to become much more energy efficient.

“We’re going to change how efficiently we use electricity – forever,” said Book.

Fannie Mae names board members

Resources on Business with China - 星期四, 12月 25, 2008 22:55 - 0 Comments

Fannie Mae, the largest provider of money for U.S. residential mortgages, on Wednesday said its regulator named nine board members, including a former Morgan Stanley executive.

The appointment of David Sidwell, who was Morgan Stanley’s (MS, Fortune 500) chief financial officer from March 2004 to October 2007, and eight others comes after the government in September forced the company and rival Freddie Mac into conservatorships under their regulator, the Federal Housing Finance Agency.

Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) have lost billions of dollars as the housing slump boosted delinquencies, raising alarm among regulators and lawmakers who are counting on the companies to help stabilize the market for U.S. home mortgages.

The other directors are Fannie Mae Chief Executive Officer Herb Allison; Dennis Beresford, former chairman of the Financial Accounting Standards Board; William Thomas Forrester, former CFO of the Progressive Corp (PGR, Fortune 500).; Brenda J. Gaines, former CEO of Diners Club North America, a subsidiary of Citigroup Inc (C, Fortune 500).; Charlynn Goins, former chairman of New York City Health and Hospitals Corp.; Frederick “Bart” Harvey III, former chairman of the board of trustees of Enterprise Community Partners; Egbert Perry, chairman and CEO of the Integral Group LLC; and Diana Taylor, a former managing director for Wolfensohn & Company.

Guangdong Set up Fund to Help Unemployed Workers

Resources on Business with China - 星期一, 10月 20, 2008 22:50 - 0 Comments

Last week, hundreds of unemployed workers took to the streets demanding a toy factory of the unpaid salary. The plant’s closure is attributed to a decline in demand from the United States.

Guangdong Provincial Labor and Social Security and Provincial Development and Reform Commission are to establish a benefit fund to help non-payment of wages for workers in financial difficulties.

Youjun Liu, the head of the Guangdong Provincial Labor and Social Security said they will help unemployed workers find new jobs, may also use legal means to protect their legitimate rights and interests.

As the rising costs of labor force and the imports, the appreciation of the Renminbi, more stringent inspection standards and other factors, the prosperity of Guangdong exporters suffered a blow in recent years.

Today, the U.S. credit crunch led to the spread of the crisis. China South factories can only rely on the instability of the loan to survive, and had to lower profits for foreign orders.

Guangzhou Honda Recall City 08

Resources on Business with China - 星期一, 10月 20, 2008 22:14 - 0 Comments

Guangzhou Honda Automobile Co., Ltd. decided to recall 132 City 08 which were manufactured in September 2008.

It’s announce that due to the use of a defective rear brake shoe components, in the process of brake, the brake shoe may be holding off in the rear wheel and brake drum with the shoe on the Block, Led to the trailer rear brakes.

Guangzhou Honda will diagnose these vehicles, replace the batch of defective rear brake shoe components free of charge, in order to eliminate hidden dangers.