As the entire
world observed in August at the 2008 Olympic Games in Beijing,
China has emerged with unparalleled force onto the world stage.
Most businesses are aware of the lure of the Chinese market, and
stories abound of unbridled opportunities and potential for
financial gain. But with all great opportunities come
significant risks. My experience practicing at an international
law firm in Beijing, China, taught me first-hand that not every
business can, or should, go to China. This experience also
helped me gain some insight as to what any attorney advising a
client about doing business in China should keep in mind.
Engage Competent Counsel
If you are advising clients about doing business in China, it is
essential you ensure that your clients engage with counsel that
is able to handle both foreign (non-Chinese) and domestic
issues, from drafting sophisticated agreements, often governed
by laws outside of China, to submitting the right forms to the
appropriate Chinese governmental entities and obtaining the
proper licenses or permits. Because the quality and competence
of law firms in China can vary tremendously an attorney should
do appropriate due diligence about the law firms and the lawyers
to whom a client is being recommended.
Large cities like Beijing and Shanghai have been inundated by
foreign law firms (American, British, Canadian, and German, to
name a few) that employ both Chinese and foreign attorneys, as
do many well-established Chinese law firms. Many of the Chinese
attorneys employed at either of these types of firms have
obtained both a Chinese law degree and a degree from a foreign
country, in particular from the United States (with a license to
practice in New York or California). Either type can also
provide a variety of corporate services to foreign clients. Keep
in mind that foreign firms are prohibited from actually
practicing Chinese law, which means that even if you engage a
foreign law firm, it is likely that a Chinese law firm will
eventually need to be involved. For example, if you need a legal
opinion, the Chinese firm will need to provide it.
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Supreme Court of China |
Structure
The Business Deal
While China’s legal system has rapidly developed to accommodate
a tremendous influx of foreign investment, significant gaps in
both the language of the laws themselves and their enforcement
still remain. Chinese businesses are heavily regulated and there
are various restrictions that foreign investors must be aware
of. For example, China restricts or even prohibits foreign
investment in certain industries, and the Chinese government
exerts significant control over the flow of foreign currency.
Of particular concern to clients, the remedies that a foreign
party can seek in the event that the Chinese party breaches an
agreement are somewhat limited. For example, in the event of a
breach, attempting to enforce a contract in a Chinese court can
be a daunting task. The judges are not bound to any kind of
precedent, and many foreign companies believe that Chinese
courts are inherently biased against them. In the event that a
judgment outside of China is obtained, it may not be possible to
get a Chinese court to recognize the judgment, making it
basically unenforceable. Good legal counsel can help protect
your client at the outset, and good advice can help prepare
clients in advance for legal realities that may be quite
different from what they have experienced elsewhere.
Five Tips Will Help Prepare You To Do Business In China
Here are a few tips for advising your clients about entering the
Chinese market.
Before you make a deal:
Make sure that you and your client observe some of the most
basic Chinese rules of business etiquette. For example, always
present and accept a business card with two hands—and do not
shove someone’s business card into your back pocket! When
dealing with a sophisticated entrepreneur, small gestures that
demonstrate a basic understanding of what is considered polite
can go a long way towards impressing potential business partners
and can distinguish your client from competitors. When working
with a businessperson who has had less exposure to other
cultures, observing basic rules of etiquette is essential to
allow your client to get his or her foot in the door in order to
begin to establish a professional relationship.
Do not assume
that a business deal will proceed in the same manner as it would
in the United States. The Chinese legal system is unique,
newly-developed and constantly changing. In 2008 alone, the
employment law in China and the entire tax code were both
revised. In the field of foreign investment, various changes to
the laws significantly altering the way that transactions must
be structured have been going on since 2005. Your client should
not be surprised if some things take longer to accomplish than
expected, or are handled in a way that is different from what he
or she had anticipated.
Negotiating the Business Deal
Maneuvering the Chinese legal system, whether to complete the
paperwork needed to obtain a mandatory license or to ensure that
one’s employment contracts are in compliance with Chinese law,
requires significant, highly-specialized expertise. Good legal
counsel will not only be able to handle these tasks, but will
also help your client understand the unique legal risks of doing
business in China, including, for example, the risk of working
with an ever-evolving body of laws (including laws that have
retroactive effect). Counsel should also help your client to
anticipate the sometimes vastly different understandings parties
may have of the most basic business and transactional terms,
including at what point have the parties reached an agreement,
and whether a contract represents the beginning or the end of
negotiations.
Do not underestimate the importance of good due diligence and
reasonable time lines. I have seen many investors rush to
complete a business deal with a Chinese company only to
discover, too late, that the company had significant accounting,
intellectual property, or other issues that could easily have
been uncovered—and handled—with basic due diligence. One common
phenomenon, for example, is that Chinese companies keep two sets
of records, one for the authorities, and one with the “real”
numbers. Practices like these, and the fact that most of the due
diligence is conducted in Chinese, help to demonstrate the
extensive time and effort that may be needed to do a thorough
job investigating a potential Chinese business partner.
Be aware that
corruption remains an on-going concern in China despite massive
reforms undertaken by the government to try to eliminate the
most abusive practices. The recent, terrible scandals involving
baby formula or toys made in China highlight the extent and
gravity of the problem of corrupt officials. Good legal counsel
can help prepare clients to anticipate and avoid this, and
similar problems.
My favorite adage about China is that the foreigner who travels
to China for a week believes that he fully understands
everything about the country. The foreigner who stays in China
for a year thinks that he knows a little bit. And the foreigner
who lives in China for decades recognizes that he does not
understand China at all, but certainly enjoys trying! In other
words, while many aspects of doing business in China are similar
to those in other countries, China presents some unique
challenges, and clients need to be fully aware of these.
(Reprinted with permission of The Complete Lawyer
www.thecompletelawyer.com)
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China Law and Justice
