A few weeks ago, a client asked my law firm to handle a relatively routine domestic matter for them. We told them we do not handle such matters and we gave them a short list of excellent attorneys that do. The client expressed surprise at our unwillingness to take on their matter and remarked on how this area of law is “so easy.” I told them that it is “easy” 90% of the time, but difficult the other 10% of the time and that we only knew enough to be able to know half the time when we would be delving into the other 10%. In other words, we would probably have a 5% error rate and that precluded us from taking on such matters.
Yesterday, the client called to thank us because its matter was one of the five percent. Though both the client and I had assumed the client needed A, it turned out that it was actually in the 1% that actually would be much better off going with B.
The percentages above are guesstimates used to prove the point that many things lawyers do appear to be and in fact are fairly routine But for any given project there is usually the ten percent, and it is that ten percent that can cause the problem.
Law firms tend to see a large number of the ten percent because we virtually never get calls from someone saying, “I just did this and it all worked out fine, can you help me?” Our typical call is more along the lines of “the Chinese government just did this to me, is there any way you can help me?”
Forming a WFOE or a Rep Office in China is an excellent example of the 90-10 rule, both because many people are not aware of the 10% and because the problems that arise from this lack of awareness can be absolutely huge.
Ninety percent of the time (a guesstimate), forming a WFOE or an RO in China is not all that complex. But it is the ten percent that will kill you.
Here are some of the ten percent issues relating to China company formation on which we have been called:
- American company that had been locally approved for its WFOE to do X was being shut down by Beijing 15 months after its formation because X cannot be done by WFOEs in China. The “funny” thing about what this American company was doing was that had it actually defined it a bit differently in its WFOE application, it would have been legal and it almost certainly would not have been shut down. For more on how important it is to get the right scope when applying to form a WFOE, check out “How To Form a China WFOE. Scope Really Really Matters.“
- An American company that had formed an Representative Office in China and then was told around three months later that it was operating completely illegally and would need to shut down. The American company explained to me what it was doing in China and without any doubt what they were doing was absolutely illegal for Rep Offices. I asked why this company had opened the RO in the first place and their response was that they had done so because it was cheaper than opening a WFOE. They had never consulted an attorney on the differences between Rep Offices and WFOEs; they had simply gone to an entity formation company with the instructions to form a Rep Office. For some very basic information on the differences between Rep Offices and WFOEs, check out “The China Representative Office (RO). Got WFOE” and “How To Form a Representative Office In China.“
- Then there are the countless calls we have received from companies who have had their WFOE or RO application declined or stuck in the system. We consider these people lucky because what has happened to them beats getting approved locally and then getting shut down by Beijing. For them we formulate a plan either to reinvigorate their existing application or to start all over. Once a company starts having approval problems, a red flag gets attached to them and so even if they completely clean up their act, they will likely be subject to increased scrutiny. For this reason, we often recommend starting all over, using a new foreign company as the ownership entity. We cannot usually do this with Rep Offices because they require ownership by a company that has been existence for at least two years.
Are you the ten percent? How do you know?
