China Law Blog

All I can say as someone who, through little foresight of her own and less start up capital, ended up closing down my SME when I shut down my marriage, is be smarter than I was. Its not that I think every marriage is bound to fail, its that long term you're going to need that JV or WOFE anyway. Sure, it'll cost you more upfront, but you'll be saving yourself months of struggle with "getting legal," arranging financing, even visa agents, if you do it right the first time.

I got out without losing everything. It was nothing short of a miracle that I was able to find someone to take over my company, and get my initial investment back. But it would have been worth a lot more if I had the legal structure in place. And more still if I had been able to keep it going through my divorce.

Your Chinese spouse is probably having a small fit about a) the amount of money this will cost, and b) the fact that you are now counting on divorce. Take your spouse out to a really nice dinner to apologize and then get your WOFE set up. Its the smart business option.

Sarah

Since this was (I think) my idea, here's my answer to Q4/5: If the marriage fails, then I'm screwed anyway, and the 'company' is the least of my worries. I would resign from my wife's company, which then folds (unless she finds somebody else with my set of skills who can take over the work), and she can re-coup whatever cash is left over after liquidation. Depending on how messy the divorce is, she either keeps half or all of it. But all of that is theoretical and unlikely -- my marriage is rock-solid. If this mechanism is legal -- I don't see why not, I'm currently also legally employed by a wholly Chinese owned company -- it remains an attractive option for me in my situation. A practical alternative is for me to quit and go work some place else, but this has two draw-backs:
1) I actually like the work I do, only would like to get paid better and do less (unpaid O.T.) hours of it, not want to do something else, and
2) at another company I might just run into the same problem all over again (expected to work hard but getting paid fairly is a constant struggle), unless I go work for a foreign company (draw-back 1).
As for Q5, how do I find out about this new law, or about any existing laws for that matter? I'm not trying to make a fast buck, avoid paying tax or any other such thing, but finding out about the rules, the law (existing and new) is not easy. My village does not have a library, let alone that they keep printed copies of law books there, even if I would be able to read/understand those (I speak the language, but reading is another matter entirely). I'm sure the various laws are on the net somewhere, but google hasn't yet told me where for all but a few, and these laws seem to be completely ignored by all relevant parties anyhow. Asking around (gov't offices) so far has gotten me mostly "illegal to sell peanut-butter in China" answers. In my experience, unfortunately, asking a Chinese lawyer about the law is less effective than setting fire to my cash (which at least lets one warm one's hands for a minute or two). Asking a foreign lawyer about Chinese law might be an option though... Anybody?

Re what happens if the business succeeds but the marriage fails: I'm not an expert on Chinese marriage/divorce law and practice, but what I do know suggests there would be no insuperable obstacles to a court doing the right thing if it wanted to. China has a community property regime, so the wealth represented by the business belongs to the community, no matter whose name it's in. Assume that an even split would be the fair solution. Although the business itself can't be split upon divorce, there's no reason why a court couldn't give more of *other* assets to the foreign spouse while giving the business to the Chinese spouse. If the other assets aren't enough to give the foreign spouse a fair deal, a court could require the Chinese spouse to pay something extra to the foreign spouse, or perhaps even to sell the business and split the proceeds. This is, I repeat, premised on the assumption that an even split of assets would be fair in the circumstances AND that the court wants to be fair. The point is just that the restriction of ownership to Chinese nationals need not be an obstacle unless a court wants to make it one.

Hi Dan
I just wanted to say thank you for your regular - and regularly fascinating - posts of 2009.
May I wish you and yours very Happy Holidays.
Kind regards
V

Hi -
As with the posts on setting up a WFOE, this is a very interesting and potentially relevant post for me. Thanks. I am looking forward very much to your post on setting up a RO, as this is something that I am contemplating doing.

My situation is as follows. I have a number of business contacts in China through my wife, who I met and have lived with in the UK for the last three years. I have been endlessly hassled to go into business with these contacts, which I have resisted until now. However, I am now dealing with the threat of being made redundant here in the UK, so it is an avenue I am exploring further.

What I would like to do is set up an agency, based here in the UK, selling consultancy services to Chinese businesses looking for information on the UK market and seeking business partners in the UK. I might then expand the business to sell similar services to UK businesses, if it proves successful.

Until now I have not really thought about how the mechanics of the operation would work - The arrangement I had set up was that I would operate in
China on tourist visas and keep the money in my wife's family. But reading through the posts here I get the sense that this is a bad way to operate and sets a bad precedent for the future development of the business, not to mention the family problems that might ensue, particularly if large sums of money are likely to be involved.

Instead I would rather operate in China legally and get money out of China legally as well. I am trying to work out whether I can do this in a cost efficient way. The solution that I had established was to set up a company here (with my business partner), and then a RO in China, albeit not one that was actually staffed on a permanent basis.

I realise that this might seem like a ridiculously cautious approach to setting up what is basically a small business and next to zero capital is involved. Apologies if I am coming across as being naive. But I'm just scoping out the options at this stage.

Re: What happens under Chinese divorce laws to something that can legally be owned only by the Chinese spouse?

The spouse who does not legally own the business is entitled to 50% of the business owner's share. This should be paid out in a cash settlement. Ownership shares cannot be transferred to a non-Chinese national. In reality, these payments are rarely made. My ex quickly took his mother on as a 1/3 partner as a way of protecting controlling interest and minimizing the assets I was entitled to in the divorce. This is also very common strategy.

No matter how it is settled, the non-Chinese spouse isn't going to end up with a legal, functioning business at the end of this process. It's legally impossible under the existing combination of family law and company structures available. And odds are high that if you make it clear you want to keep the business going and your divorce is at all bitter, it'll be liquidated or sold or run into the ground by the time you reach divorce court.

A Sino-Italian pizza cafe marital 'joint venture' in a well known Yunnan tourist town ended very much in the way you warned your caller. Business good, marriage suddenly terminated ... you can guess the rest.

Sarahplusone,

Thanks for both of your comments. I must say I learned a ton from them as I have yet to have had any involvement in a matter involving a marriage that went bad while the Chinese business was doing well. What you say makes complete sense and is not the kind of thing one can learn from the law textbooks.

Jay,

It was NOT you who spurred the question, but it just goes to show how widely applicable it is.

Generally, the best way to find out about a Chinese law is to read it in Chinese and discuss it with those who enforce it and with those who operate under it. Laws standing alone usually do not tell you everything you need to know. This is true everywhere, but particularly true in China where laws come out lacking regulations on the nitty gritty of their enforcement and so much of what is considered law is oftentimes just how a law is interpreted or enforced.

I have been very hesitant to write about this new law because the law itself only says so much and I am certain that the real bones of it will not be clear for quite some time.

Don,

What you say makes complete sense.

ukvisa/V,

Why thank you so much and the very same to you!

glebester,

It is the opposite of "naive" to seek answers to very complicated questions.

HM,

I can guess the rest, but I have to admit my guess is not being made with a whole lot of confidence so I for one would love for you to tell us "the rest." I'm guessing the poor foreigner ended up leaving China with no more assets he or she had than before he or she went in and created a very successful business.

The problem in China is the same as everywhere: in the presence of bad faith or degraded interpersonal relationships, the most tightly written contract is worthless.

Westerners often lack the interpersonal sensitivity and psychological flexibility to function intelligently and smoothly in Chinese society, e.g. if you get confrontational, it may secure a tactical victory, but you have just set yourself up for payback time.
Confrontation and display of anger flag you as a infant having a temper tantrum and they are embarrassed as hell to be seen hanging out with such a jerk. You also come across as ungrateful for the opportunity they invested time and effort in setting up. Ever since the difference between you arose, your Chinese partner had been sending out signals but through a mix of your cultural inexperience and limits on language skills on both sides, most msssages got lost, missed or miscontrued. Suddenly you're out in the cold feeling all bitter because they are all "two-faced".

Um, not necessarily although here, as elsewhere, you will run into individuals of most moderate honesty.

All else being equal, natives perfectly at home in their own country will have little incentive to do things in any manner they find foreign, unnatural or counterintuitive.

If you are going to be an off-the-record partner, then you had better create such an incentive by holding an irreplaceable skill or asset. That failing, it is entirely up to you, the foreigner, to kiss up to the local culture and do things the native way.

Which is what you would expect of foreigners operating in your native land.

Otherwise, once your partners have determined you aren't playing ball, they will figure out how to operate the business without you.

Being a PRC attorney, I suggest, for that man who mentioned "So our plan is for the Chinese company to own the website and then we will have an oral agreement (or a written agreement) that I really own half of it", that in the provision of Resolution & Dispute in a written agreement between you and your Chinese company an arbitration should be executed on Hong Kong International Arbitration Center.
In Hong Kong the arbitral award is likely in favor of that man. Then he can apply for enforcement of such a decision in the Mainland. Finally, he can retrieve his property.

Exactly what you describe happened to me and I have since learned of a couple of other people who this also happened to. I wish I had read this post before I went into the deal, though honestly, I probably would have done it anyway, since like everyone else, I believed mine would be different and the people who cheated me were my friends. You have completely called it.