Tuesday, November 29, 2011

Wind-Up/Shutting Down a Company in China

Because of, mainly, the increased cost of doing business in China, many of our SME clients that are operating in industries under tight margins, have decided to closes businesses in China and move to what many think will be greener pastures.  Some of these clients include Chinese companies.

The favorite destinations of our clients are Vietnam, Cambodia and Laos. Many find that Southeast Asia is a more difficult place to do business, but allows more healthy margins for their business.

Please, shut down your company in a “legal” manner or you may find yourself at an airport/border crossing with an immigration official informing you that you are not able to leave China before settling lawsuits, tax issues and criminal charges. We have seen and gotten companies out of these matters far too often.

The process of shutting down operations in China for a Wholly Foreign Owned Enterprise/Wholly Owned Foreign Entity (“WFOE”) is most easily done by foregoing the wind-up/dissolution or liquidation procedures in favor of:

1. Terminating all company workers legally under China Labor Law. Few workers are “at-will” workers under Chinese law and procedures will need to be followed and severance will need to be paid in exchange for releases;

2. The continued payment of all government taxes, licenses and other obligations;

3. The continued compliance with Chinese reporting and filing requirements; and,

4. Paying off all obligations including lease, equipment rentals, and outside agents etc.

This procedure is often less costly than the dissolution or liquidation procedure in China. However, in many cases, dissolution or liquidation is required under Chinese law or advisable because of the necessity to obtain approval to export machinery.

I will be writing articles on the dissolution and liquidation procedure in China in the near future.


Friday, November 25, 2011

China Law Firm: China, Korea, Southeast Asia Law Firm/Lawyer List for IPG Legal's Practice Teams

IPG attorneys and business professionals are proud to be some of the world's most experienced professionals focused on the practice of law in Asia. Our boutique mid-size law firm, through our local connections, six global offices, a leading-edge case management system and real on-the-ground Asia experience, has garnered a reputation for providing effective and efficient legal solutions in some of the most complex international business matters.
We are engaged in projects, exclusively, in Bangladesh, Cambodia, China, Korea, Laos, Myanmar (Burma), Vietnam and the United States through the China Practice Team; Dispute Resolution & Litigation Practice Team; Korea Practice Team; U.S. Immigration Team; U.S. Investment & Corporate Law Team; and Southeast Asia Practice Team. We work with both Fortune 500 companies and SMEs.

PEER RESPECTEDOur professionals are often quoted by the New York Times, The Wall Street Journal, CNN, Bloomberg, Financial Times and local news sources. Our Korean Law Blog has been nominated as one of the Top 25 International & Foreign Law Blogs by LexisNexis and our China and Asian law blogs have been extensively quoted by our peers and the news media. Many of our attorneys have been rated Excellent by Avvo and other lawyer rating services and we are, often, consulted by local governments, U.S., British, German, Chinese, Russian and French law firms for matters for their clients.

Our professionals are proud to have gained over a decade of experience in working with Fortune 500 companies, SMEs and entrepreneurs on projects throughout Asia and the states. Our professional roster includes former politicians, judges, prosecutors, government minsters, senior military officers, in-house attorneys, senior government officers, and directors/executives of multinational companies.

We never, simply, fly someone in for a project. We live and work in Asia. The chairs of our China, Korea and Southeast Asian practice teams were born in America, but have worked in Asia for most of their adult lives and deeply understand the legal systems, business practices and local culture of the local jurisdictions.
The IPG is managed by a group of some of the most known American lawyers in Asia and assisted by local politicians, retired judges, prosecutors, in house attorneys, senior government officials, local attorneys and directors/executives of multinational companies. We strive to provide service to a level equal to the best U.S., British, Australian, German and French firms. This is accomplished thorough a sophisticated case management system, a systematic approach to the practice of law and the active involvement, in all cases, of our American attorneys and senior local partners and consultants.

Our attorneys have significant international experience in: Arbitration, Asset Protection & Management; Corporate Law & Compliance; Dispute Resolution & Compliance; Energy & Mining; International Business Transactions; Infrastructure & Development; FDI & Free Trade Zones; Franchise & Retail; Intellectual Property; Joint Venture Dispute Resolution; Mergers & Acquisitions; Real Estate Development; SME Market-Entry; and Taxation & Customs.


Wednesday, November 23, 2011

The China Grey Market Scam: Protect your Companies Reputation in China

I just posted this post on the Korean Law Blog. The same advice applies to all relationships you have with agents and potential agents in China.

Many of my clients operate, in Asia, through relationships with agents. The local agent, normally, holds an exclusive right to sell the client's product in the local jurisdiction.

For example, one of my clients sells medical lasers. The company has relationships with agents throughout Asia. The relationships guarantee the agent an exclusive right to sell the lasers in the nation the agent is located in. The agent, also, is responsible for managing technical, warranty and other after-sale matters in the jurisdiction.

One Korean company approached my client and noted that they are a Korean company with an office in the Philippines. My client has no agent in the Philippines. The client, thankfully, smelled a rat and called me. If you hear of a Korean, Chinese, Vietnamese, Thai or other nationality doing business in a country, other than their own, please smell a rat.

After doing a little investigating it became clear that this company was simply going to import the product into the Philippines and then transport the product to Korea.

Some may be saying - who cares. The client will still get the sale.
The client, the agent and the end-user will care.

First, the price in the Philippines was cheaper than in Korea, since no on-the-ground technical and after-sale support were to be provided with the purchase. The less than scrupulous Korean company may be promising the same technical and after-sale support as they would, normally, receive in Korea. The Korean company would, also, expect this support even without the promise.

Secondly, the local agent would be not too happy to receive a call from the Korean end-user requesting support, warranty services and technical assistance, since the authorized Korean agent would realize that they were cut out of a sale.

Lastly, brand image is important. An agent, that you have not built a relationship with, may be misrepresenting your product or making promises that can never be fulfilled.

Beware the Grey Market Trap through due diligence, street smarts and a demand to know the end-user. It is often better to lose the sale than to lose your reputation.

Engage in no agency agreement with any agent in Asia without a review of the agreement and the agent by an attorney experienced in the jurisdiction.

Other Articles that may be of interest:

ICANN Can Help Solve your Trademark Infringement in an Internet Domain Name Dispute in China

I recently contacted one of my clients doing business in China concerning a Chinese company that failed to take a business ethics class.

The Chinese company registered a domain that simply attached the word China onto the client’s registered trademark.  Yes, as I advised on this blog many times, the client registered their trademark in China.

This tactic by the Chinese Company is intended to increase hits to the website and sometimes to even sell fake goods.  In this case, it seemed like the company was intending, in the near future, to sell its own goods with an intent to confuse buyers.   The site was good enough to confuse even the most careful of buyers.

The client was not too amused.  Luckily, we shook the domain out of the Chinese company and put the fear of a lawsuit and prosecution into the company.

However, if your lawyer is not able to succeed in the shack down - a great option is available.

Have you lawyer file a complaint/dispute to the The Internet Corporation for Assigned Names and Numbers (ICANN) through  ICANN’s  dispute resolution system.  ICANN is an organization authorized through an international agreement to, inter alia, register, deregister and transfer domains.

If the tribunal rules that the domain is being utilized in “bad faith,” then ICANN may deregister or transfer the domain name.  If the procedure fails, then, local options are available.


Tuesday, November 22, 2011

IPG's Sister Blog Nominated as Top Legal Blog (www.thekoreanlawblog.com)

IPG Legal is proud to announce that IPG's sister blog The Korean Law Blog has been designated by LexisNexis as one of the Top 25 Blogs in International & Foreign Law.

Additionally, AVVO's Blog List consistently ranks The Korean Law Blog as one of the Top 25 Legal Blogs in the World and many of our attorneys receive their highest designation - Excellent.  We are proud of these accomplishments and hope you will visit LexisNexis to see the other nominees and winners HERE.

We hope next year The Asian Law Blog and The China Law Blog will also have the opportunity to be nominated by LexisNexis and be placed on the AVVO Blog List.  


Sunday, November 20, 2011

Do you Have a Buggy Whip Factory in Korea/China

In many ways, the 19th century continued until the outbreak of World War I. The 20th century ended with the fall of Lehman Brothers.

In confusing times such as these, it is natural for people to draw parallels as a way to understand current events surrounding us. They hope to gain some insight on an uncertain future. Here are some examples: A recent issue of BusinessWeek suggested that America of 2009 may learn from Japan of the 1990s. In Korea, journalists, businesspeople and even some economists refer to the 1997-98 Asian financial crisis as a case study from which they may forecast a future.

But America is not Japan.

In so many cultural and political ways, such comparisons defy making accurate projections. And the "IMF Crisis" was a regional event. It was relatively isolated from the global economy, compared to the worldwide crisis we face today.

Today, several public figures in Korea amaze me. Some continue to suggest the tough times we are facing will be followed by a V-shaped recovery, similar to what Korea experienced in the Asian financial crisis. When I recently challenged one such speaker, the well-respected economist backpedaled. He stated his V-shaped Korea recovery model was premised on the Chinese stabilizing their chaotic economy within this year.

But anyone following the mass factory closures in China, with the growing threat of political instability there, is not likely to count on the Chinese economy being substantially on the mend within the coming 12 months. And yet one frequently hears this kind of siren song.

If one were to find a meaningful historical parallel relevant to what we are now facing, it would be Sept. 15, 2008 and June 28, 1914. We can easily recall when Lehman Brothers filed for Chapter 11 bankruptcy. That in effect announced the beginning of this global recession. And as any schoolboy can recite, it was in 1914 when a Bosnian Serb assassinated the heir to the Austro-Hungarian throne.

Both dates, in real terms, triggered the beginnings of their centuries.

In many ways, the 19th century continued until the outbreak of World War I. The 20th century ended with the fall of Lehman Brothers. Both 1914 and 2008 were major watersheds.

And we, having just entered this Brave New World, are just beginning to realize what has happened.

Now that we have been thrust into a major historical shift, we may find our greatest difficulty comes from not adapting.

Our real challenge could lie in letting go of anything that becomes an impediment to future survival.

We often cite buggy whip manufacturers as iconic representations of the 19th century. I am sure many buggy whip companies were thrilled by the initial explosion of sales orders with the outbreak of the First World War. All the armies were still largely dependent on horsepower. In other words, most buggy whip manufacturers didn't realize their market would soon disappear.

My point is this: our best survival strategy may not be trying to survive a short- or medium-term downturn only so we can continue to make our buggy whips.

We may be better off by pondering two considerations. First, this economic recovery is global and is likely to be U-shaped, if not L-shaped.

Look at the current issue of Foreign Policy. There, the highly regarded NYU economist, Nouriel Roubini, who correctly foresaw the current crisis over a year ago, warns of the U.S. facing a 24-month, U-shaped recovery that could well extend into being more L-shaped in reality. Many people think Roubini will be proved right yet again.

Given this and other economic indicators, business managers may be better off planning for the long haul. They probably should not base their business plans on the relatively rosy projections of consultants and politicians.

The second consideration is determining what survival strategies and tactics may be necessary to get through the following two years and beyond. Up until this point, many companies have already done the obvious. Primarily cutting costs and searching for new means of finance. Some are restructuring, to maintain profitability while doing essentially the same kind of business. And some companies are going on buying sprees to pick up the fire sale bargains that pop up at times such at these. All of this may be fine for strengthening an existing business strategy.

But remember those buggy whip manufacturers who must have done well at the beginning of World War I. Ultimately, the most important, long-term consideration a business planner may need to factor in, is what kind of business will be viable five years from now.

We don't have space in this column to go into detail about the future. But Bob Dylan once sang, "You don't need a weatherman/ To know which way the wind blows." The reader can probably imagine where we are going.

I will give one scenario. Consider that we will be living in a world of more independent energy sources. Governments and buyers will demand products and services that generate smaller carbon footprints. Both consumer and industrial consumption behavior will be less disposable and more value centric. Even the defense industry will be ?greener? as nations become increasingly concerned about contamination.

Regardless of how you view the future, the ultimate question facing you right now may be this: How relevant will your business be in a very different world of 2015?

The time to start planning for long-term survival could be now.

*The writer is the president of SoftLanding Korea and a Senior Commercial Adviser for IPG.

Thursday, November 17, 2011

Entering the Chinese Market Through Hong Kong: Don't Just Trust Us

I have been advising anyone who would listen, and for quite a few years, that Hong Kong was the place to structure both outbound (from China) and inbound (to China) investment, whether via China public equity markets, private debt or equity, joint-venture or merger or acquisition.  As I referenced in an earlier posting Register your Company in Hong Kong and then Enter the Chinese Market: Hong Kong Phooey Way has one of the most reliable legal systems in the world, low and flat corporate and personal tax rates at 16.5% and 15% respectively, no taxes on capital gains or dividends and no death or inheritance tax – just to name a few benefits.   

In fact, Hong Kong was rated number one by the Heritage Foundation and the Wall Street Journal in their 2011 Indicator of Economic Freedom with the United States lagging behind (and slipping) at number 9.  Hong Kong has been ranked in the top spot for the past 16 years.

I was explaining to a new associate lawyer why we use Hong Kong law for cross border (into and out of China) corporate structuring and investment.  While the tax advantages are obvious, one of the most important is the reliance on Hong Kong law which is based upon British Common law and similar to the legal systems in most developed countries in the world.  Not only is the law clear, simple and reliable, but, more importantly the courts are independent and can generally be counted on to produce fair results.  

This is different than in China where the law is relatively clear and straight forward, although at times probably not broad enough, but, the courts cannot be relied upon to produce fair results.  There are many reasons for this one of which is the development of the legal system and the education and frame of reference of judges.  Another is the overriding obligation of mainland lawyers and judges first to the State and the Party, then to ensure a “harmonious society” and then finally to the litigants.  This is not meant to be a criticism of the legal system, but, in fact this is the way it is in many Socialist systems.

The new associate understood my lesson and then asked what is the most difficult thing for foreign (non Chinese) clients to understand about the legal system in China.  Well, in addition to what I mentioned before, the most difficult is the unwritten practice of deciding cases based upon comparative responsibility.  Judges in China will most often apportion fault, liability and damages, even where one party is clearly in breach, based upon comparative terms. 

I have seen too many cases where a Chinese factory or supplier is sued by a Western company for breach of contract (and the Western Company is clearly deserving of a 100% recovery) and after lengthy arbitration and litigation the judge determines that the Chinese company is 60% liable and the Western Company 40% liable.  The reasoning astonishes most Western lawyers and company executives as it is often based upon maintaining a “harmonious society”.  It can leave a bad taste in their mouths and perhaps deter them from further investment in what is the fastest growing economy in the world.  

I thought an article I recently saw entitled Beijing Eyes HK-Mainland Overseas Business tie-ups Chinese Officials Urge Cross-Boarder Collaborations using City's Advantages in Services to Expand China's annual Foreign Investments to More than USD 100bil as Beijing even recognizing my above point. 

by Frank Caruso
Chair, China Practice Team

Wednesday, November 16, 2011

Acquiring Shares in China: Don't Forget the Due Diligence in China

I just received a phone call from a prospective client with a wonderful product that has been offered a sweetheart deal.  Whenever I hear that someone has received a no risk or sweetheart deal in Asia, a red flag immediately goes up in my head and I immediately request the client to let me do a couple of weeks of due diligence.

The, ubiquitous, sweetheart deal is ownership of shares in company in exchange for some benefit from the foreign partner.  Too often, the Chinese, Korea, Cambodia etc. company is a shell.  The shell is broke with liabilities that far exceed assets.  The shell, however, is paying his management handsomely through a variety of interested transactions and access to the expense account.  In one case I regrettably saw, the company was under investigation of the prosecution.

Thus, you sweetheart deal may lead to unexpected liabilities, the deterioration of your brand image, the eyes of investigative bodies and additional legal fees and lost future opportunities. 

Do yourself a favor, engage a professional to engage in a little due diligence.  I wrote many article about due diligence in Korea and China.  A few are below.

_________ SeanHayes@ipglegal.com

China not on the List of Top 100 Global Innovators: When?

The only Asian countries with companies on the 2011 List of Top 100 Global Innovators is Japan with 27 companies and Korea with 4. So yes, no China on the list.

America leads the list with 40 companies followed by France (11), Sweden (6) and Switzerland (3).

When will China appear on this and like lists?

Monday, November 7, 2011

Forming/Registering a Company in China: A Checklist

Normally, we advise to form a company in Hong Kong and enter China via a special purpose company.

When we form a Wholly Foreign Owned Enterprise (WFOE) in China our attorneys use the following check list. 

The check list is not exhaustive and is intended to tickle the lawyer's memory.  We work in a systematic manner and utilize numerous checklists and the like.  The mention of the other checklists in the below checklist are separate checklists that will be posted over the next few weeks. 

We have utilized these lists over practicing for more than a decade in China. 

Please be aware that this is not something that you can do without the assistance of a professional, however, the list is useful in assuring that the law firm you employed knows what it is doing - many don't. 

Often the local firms, and even foreign firms dominated by Chinese lawyers, have little experience with the formation of companies for foreign enterprises and/or work in a manner that is as systematic as a flea circus. 

We are proud to be the most experienced in forming companies in Shenzhen, the Pearl River Delta and the rest of South China and also one of the most experienced in forming WFOEs throughout China.
Checklist for Forming a WFOE Business in China
  1. Foreign Allowed Business Conduct: See Checklist A?
  2. Draft: AOI, Bylaws (Chinese and Korean): See Checklist B.
  3. Draft all: "Basic Agreements:" See Checklist C"
  4. Commissioned Feasibility Study - See Checklist D?
  5. Hong Kong/Home Incorporation Documents?
    1. AOI
    2. Bank Statement of Funds
    3. Business Plan
    4. Corporate Register/Status/Authorization
  6. Authorization Documents: POA etc.?
  7. Financial Documents?
  8. Approval, Government Contacts to Contact

Entering China: Basic Agreements Needed Before Making the Deal in China

I have included below some basic Chinese start-up agreements, normally, necessary for doing business in China. The list is not exhaustive and anticipates a joint venture.

We will be writing on all of these agreements over the next couple of months. Please note we have articles about Chinese shareholder (JVC), distributor, license and other agreements already posted on this blog and the www.theasianlawblog.com
-Company Formation Documents for China
  • Shareholder Agreement/Joint Venture Agreements
  • Article of Incorporation and bylaws
  • Intellectual Property Assignment/License Agreement
  • Confidentiality/Nondisclosure Agreement
-Employees and Management in China
  • Employment/Contractor Agreements
  • Employment Rules
  • Confidentiality, NDA Agreement
  • Service Agreement
  • License Agreement
  • Sales/Distributor Agreements
  • Lease Agreement
  • Terms of Use/Privacy Policy
Please do yourself a favor and don't simple use agreements you us back home.  Get the agreements drafted by a law firm in China with actual experience in China. 

Wednesday, November 2, 2011

Do Contracts Matter in China?

I just read a blog post explaining the need for carefully drafted agreements in China and how many clients of the blogger note that they would not pay for an agreement drafted by an attorney when the Chinese won’t follow the agreement and the Chinese courts will provide no remedy to foreigners.

Assuming that these statements are correct by the client (they are not), don’t waste your money in China and, please, suspend this belief and get professionally drafted agreements for all relationships that you develop in China.

If you believe the Chinese counterpart will not honor the agreement and that China will provide you no remedy for breach, then, simply avoid China. This attitude will likely cause many issues that will lead to you wasting your money in China. The reality, however, is far from this gross and naïve understanding of China Law.

China Law Blog posted a good article on the reason for having agreements in China. The article notes that:

"1. Clarity. The first is to achieve clarity. To make sure you and the Chinese company are on the same page. For example, if you ask your Chinese supplier if it can get you your product in 20 days, it will say "yes" pretty much every time. But if you put in your contract that the product needs to ship in 20 days AND for every day it is late, the Chinese company must pay you 10% of the value of the order, there is a great chance the Chinese company will get honest with you and tell you that 20 days is impossible. At that point, you and the Chinese company can figure out what is realistic and then you know what to expect, realistically, going forward. Needless to say, I can give countless examples of this sort of thing, but this is yet another reason why we advocate putting your contract in Chinese. Clarity before you start the relationship. It is more important than you think.

2. Stricture. The second benefit of having a contract with your Chinese counter-party is that it will likely bring that company to heel. By this I mean that just having a well written contract that is at least potentially enforceable means that the Chinese company knows exactly what it must do to comply. And, in most cases, it might as well. Let's use the 20 day example as the example here as well. If your Chinese manufacturer makes widgets for 25 foreign companies and 5 of those have very clear time deadlines with a very clear liquidated damages provision, and the Chinese company starts falling behind on production, to which companies will the Chinese manufacturer give production priority? Of course it will put the five companies with a good contract at the front of the line.

3. Enforceability. Here's the funny thing. My firm has written hundreds and hundreds of China contracts and we have never once been called on to litigate any of them nor am I aware of any of them having been litigated. I attribute this to reasons #1 and #2 above, but I have to admit that this also means I cannot stand up and scream that Chinese courts enforce well written contracts. Even better though, I can stand up and scream that they do certainly seem to prevent problems. Even though I cannot speak regarding the enforcement of my firm's contracts, I can say that where my firm has sued or threatened to sue or arbitrated or threatened to arbitrate on contracts written by others, we have felt that China does enforce contracts. More importantly, however, the World Bank feels the same way, ranking China 16th among 183 countries in terms of enforcing contracts."