Photo of Dan Harris

Dan Harris is internationally regarded as a leading authority on legal matters related to doing business in China and in other emerging economies in Asia. Forbes Magazine, Business Week, Fortune Magazine, BBC News, The Wall Street Journal, The Washington Post, The Economist, CNBC, The New York Times, and many other major media players, have looked to him for his perspective on international law issues.

This case is becoming a bit of a cause célèbre in Canada, as “lawyers and politicians lining up behind the couple describe their detention as outrageous, excessive and a gross violation of personal liberty and security.” The couple own Lulu Island Winery, which before the couple’s arrest claimed its exports accounted “for almost 20 per cent of all Canadian wine exported to China.” “The allegations are that ‘a certain brand of ice wine in Canada’ had been declared at around 10 Yuan a bottle (under $2 Cdn), when it was worth many times that amount.”

Many in Canada see this case as a political one and calls are going out to get Prime Minister Justin Trudeau to intervene. One Canadian politician is quoted as saying “the Trudeau Liberals are mishandling the case by treating it as a consular issue, instead of a serious trade dispute.” The Canadian lawyers for the couple have also expressed their dissatisfaction with the Canadian government for not “holding China customs to account.” The lawyers also submitted a briefing paper to the Canadian government that “hints the couple became a target of Chinese wrath because they maintained their innocence” and further stating that “‘many other foreign wineries…were similarly charged but released shortly after admitting to the under–reporting and paying…fines.'”

We used to write fairly often about foreigners getting caught for China customs violations, but we mostly stopped when the number of such cases began to decline. But since Trump’s election as President, we have seen a rapid uptick in China customs problems — at least for U.S. companies. But in terms of how to avoid China customs problems, what we wrote in a 2013 post, entitled, China Customs Problem? Keep Your Mouth Shut! still holds true today:

The point is that no matter how warm and fuzzy you want to get with China customs, it has zero desire to get all warm and fuzzy with you. Their goal is to fine you as much as they can and then maybe just toss you in jail for good measure. Their goal is to make their quotas and you are their quota. If China customs comes gunning for you, seek help and fast. For more on this, please check out and read China’s Detention Of Foreigner For Alleged Customs Violation Should Be A Strong Warning

So what can you do to avoid a major China customs problem? The following is the bare minimum:

  1. Do not underreport or in any other way lie to China customs. China customs is really good at discovering the truth and they — like pretty much everyone else — do not like those who try to dupe them. What always shocks me is not that the companies that come to our China lawyers  after having been caught by China customs were caught by China customs, but their shock at having been caught. If your website says you sell your widgets for USD$1850 and you declare their value with China customs at USD$450, you will get caught. If you have a valid basis for pricing your product differently for China (maybe the product just looks the same as the one on your website, but it isn’t) you may be able to avoid a customs problem. But if you don’t, you are in trouble and saying that everyone else does it or that your Chinese general manager told you to do it is not a defense.
  2. If China customs seems to be coming after you, it almost certainly is coming after you and the odds are good they are thinking about criminally prosecuting you. In other words, if China customs questions something you did, they are likely gathering up evidence to proceed against  you criminally. And at this point, there two things you should do: shut your mouth and get a good lawyer.
  3. And if you did violate China customs laws, it often makes sense not to claim innocence because China goes much easier on those who confess. The article above hints at this But before you admit anything, get a lawyer because there are right and wrong ways to admit to things.

Be careful out there.

International litigation and debt collection
It’s a small world after all.

A German lawyer for a German company owed money — lots of money — wrote me last week to discuss retaining my law firm to try to collect on its debt by seizing U..S and Canada real property believed to be held by its Chinese citizen debtor. This lawyer was coming to me because he had liked my quotes in a Vancouver Sun article from last year, entitled, More Chinese cases target property in B.C., say lawyers.*

The headline of this article is 100% correct, but the increase in lawsuits targeting properties in both the United States and Canada is not due to any change in laws; it’s due to the increase in the number of properties held by Chinese nationals in the United States and in Canada. And these lawsuits involving United States and Canadian courts stem at least in part from the trust so many have in the efficacy of our two legal systems.

At least ten years ago, the Tokyo’s Yomiuri Shimbun interviewed me for an article, entitled, “The Americanization of Law,” [the link no longer exists]. The thesis of that article was that American law and American lawyers influence business laws the world over. Call it Americanization or whatever else you want, but the trend towards an overall liberalization of laws is so common as to be almost inexorable. That article focused on how companies in countries with less developed legal systems so often will engage in legal gyrations to get their cases heard by U.S. judges. That article mostly focused on how Russian and Korean companies were using the U.S. courts to sue other Russian and Korean companies and then seize their assets in the United States. This use of United States and Canada courts has not changed.

Anyway, back to the Vancouver Sun article, which has a somewhat similar thesis:

Lawyers say they are seeing a substantial increase in B.C. court cases filed by Chinese companies seeking to seize real estate assets from Chinese immigrants in B.C.

The Chinese plaintiffs are asking B.C. judges to enforce monetary judgments awarded in Chinese courts. These Chinese rulings typically involve people found in China to have defrauded Chinese banks or business partners and then fled to Canada with the money and invested in real estate here.

The rapid rise in the numbers of Chinese cases in Canada and the U.S. — two preferred destinations, according to the Chinese government, for financial fugitives — has also been recognized by Dan Harris, a Seattle lawyer who advises international law firms on strategies for recovering assets from Chinese defendants.

Such cases have been trickling into B.C. courts for several years, including a 2015 B.C. Supreme Court award of $670 million to the Bank of China against money allegedly laundered through buying multiple homes and setting up bank accounts in Richmond.

But, according to Vancouver lawyer Christine Duhaime, a precedent-setting case in June appears to have opened the flood gates.
Duhaime says that after her client, China Citic Bank, won a so-called Mareva injunction from B.C. Supreme Court, prohibiting the sale of four Vancouver-area homes worth $7.2 million, calls from China poured in. The homes belong to a couple who were alleged to have “fled China” with an unpaid $10-million loan.

Duhaime says she understands this is the first case of a Mareva injunction, also called a freezing order, being won by a Chinese bank in North American courts. Such injunctions prevent assets from being sold before a court can rule on whether they should be used to repay a court award.

Based on the case, Duhaime says she has obtained information from China alleging that “billions of dollars” of bank fraud proceeds are invested in B.C. real estate. She said she could not share the documents for reasons of client privilege.

Many years ago, my law firm represented a former Hong Kong police officer who had left Hong Kong maybe thirty years earlier, under a cloud of suspicion for having engaged in large-scale corruption. The City of Hong Kong had somehow learned that this police officer now owned substantial properties in Washington State and in California and it sued him to get that property.

The litigators at my law firm have litigated a large number of similar cases over the years, mostly involving private, not government, litigants. In many of those cases (most?) the plaintiff has chosen the United States as its venue from a whole host of options, including its home country, simply because it believes the United States courts are most effective in rendering judgments and — even more importantly — having the capability to collect on those judgments by seizing assets. Many years ago, we were retained by an American company to enforce its Chinese judgment against a Chinese company in a California court. Its thinking — which was absolutely correct — was that it had spent years trying to collect against this powerful Chinese company, based in what was for China a small town and it would never succeed there. So we were tasked with turning the Chinese judgment into a United States judgment and then seizing product from the Chinese company as it came into the United States and payments to the Chinese company as they left the United States. These sorts of cases are also becoming more common.

What’s so interesting about the Vancouver Sun article though is how it reveals the pent-up demand for lawsuits by Chinese companies against Chinese citizens with property in British Columbia:

“The (Citic) Mareva case absolutely increased the interest in China, and caused a number of banks in China to reach out to us and say ‘We have all these cases. Can we do something in B.C., too?’” Duhaime said. “There is lots of cases coming down the pipe, and there is lots of appetite in China from the government, down to the banks, to come to B.C. to enforce judgments.”

In the Citic case, the defendant, Shibiao Yan, a citizen of China, is now seeking to overturn the Mareva injunction. Yan argues Mareva is a “harsh and exceptional remedy that should only be available in the clearest of cases,” according to B.C. legal filings. Yan’s lawyers did not respond to a request for comment on the case.

Duhaime says as the Citic case continues, her law firm is already working on new cases.

“One of our next projects is a Toronto house we are looking at, worth $100 million,” Duhaime said. “A guy went to a bank in China, defrauded them, got a loan and all the money in one day, and moved to Canada and got a mansion. And no one asked any questions, even though he never worked a day in Canada. It’s all the same type of story, where a foreign national doesn’t have a job, but is living in homes in Canada and owes money to a bank in China.”

Another Canadian lawyer expects these cases to increase as well:

McGowan said that he could not speak specifically about the case. But he told Postmedia that he anticipates a growing wave of legal actions from Chinese citizens seeking to recover debts by targeting B.C. properties.

“What I can say generally is that I’ve seen and I’m anticipating seeing a lot more claims like this,” McGowan said in an interview. “The amount of inflow litigation from China is substantial. I think the Chinese are starting to appreciate there is an opportunity to make recovery on their losses in China … against people who have immigrated to Canada.”

I then seek to explain the reasons for increased interest in pursuing Chinese-owned assets overseas:

Harris, the Seattle lawyer, said he agrees with the Vancouver lawyers “100 per cent” that cases from China are rapidly increasing.

“There is an influx of these cases because they are in some ways so easy to bring in the U.S. and in Canada,” Harris said. “And, more importantly, they are so easy to collect on, unlike in China, where winning a case is one thing but collecting on the judgment is another.”

Harris said his firm is often approached by Canadian and U.S. lawyers seeking to recover assets from companies and people in China. He advises these lawyers to seek out assets owned by the litigation targets outside China and then take action “in other countries with more effective legal systems for collecting on court judgments or arbitration awards.”

But just to clarify. Suing Chinese individuals and companies in the United States or Canada makes terrific sense if they have assets in the United States or in Canada, but it will probably not make sense if they do not. One more thing you should know, however, is that it is very easy to get a judgment in the United States and then take that judgment to Canada and turn it into a Canadian judgment, and vice-versa. So if you are owed money by a Chinese national or a Chinese company that has assets in both Canada and the United States, you probably will be able to get away with suing in just one of the two countries and using your victory in that one to collect on assets in both.

Isn’t international litigation fun?

 

* It turned out that the Chinese citizen did not own any property in the United States or in Canada — or at least any that the German company’s private investigator could find — which is what allows me to mention this matter here. I also changed the facts a bit as further camouflage.

 

INTA 2017 Spain IP lawyersIf you are going to be in Barcelona during INTA 2017, please let us know via an email to firm@harrisbricken.com and we will do our utmost to have one of our lawyers meet up with you there. Four of our lawyers will be there throughout the conference, including two of our lawyers from our Barcelona office, Nadja Vietz and Joaquin Cabrera. In addition to our home-grown talent, Mike Atkins (world famous for his Seattle Trademark Lawyer Blog) and Alison Malsbury (who spoke at INTA last year on cannabis trademarks) will also be attending. 

Please don’t tell anyone, but our having a Barcelona office means we know all the good places to go, including those that will not be overwhelmed by INTA hordes. 
 
As much as our China lawyers, including me, wanted to go to Barcelona for INTA in the end, work prevailed and we will all be in China or the United States for the duration.

国际商标协会2017年年会将于 5月20日-24日在西班牙巴塞罗那举行。我们衷心希望通过本次年会结识更多国际业界人士并建立友好关系。如果您也会去巴塞罗那参加此次年会,欢迎发送电子邮件到firm@harrisbricken.com 与我们联系, 我们会尽全力安排我们的律师和您在巴塞罗那见面。除了我们巴塞罗那办公室的两位律师Nadja VietzJoaquin Cabrera之外,西雅图总部的Mike AtkinsAlison Malsbury也会前往参会。Mike是拥有多年执业经验的西雅图商标律师,常年在著名的西雅图商标律师博客上发表商标法相关文章。另一位律师Alison 则在去年的国际商标协会年会上就大麻行业的商标法律问题发表演讲。

另外,我们的巴塞罗那同事熟知当地景点和文化,他们能告诉您本地人喜欢的去处,避开过于拥挤的热门旅游景点,帮助您了解巴塞罗那独特的魅力所在。

尽管我们的中国法律师(包括我自己)都非常希望前往巴塞罗那参与这次年会,但由于实在无法从工作中抽身,我们还会继续在美国和中国为您提供服务。

Sollten Sie an INTA 2017 in Barcelona teilnehmen, geben Sie uns bitte per E-Mail an firm@harrisbricken.com Bescheid und wir würden uns freuen, ein Meeting mit einem unserer Anwälte organisieren zu können. Vier unserer Anwälte sind während der Konferenz in Barcelona, einschliesslich unsere “spanischen” Anwälte aus unserem Barcelona Büro, Nadja Vietz und Joaquin Cabrera. Zusätzlich zu unserem Barcelona Team werden Mike Atkins (bekannt für seinen Seattle Trademark Lawyer Blog) und Alison Malsbury (welche bei INTA im vergangenen Jahr über Cannabis Branding vortrug) teilnehmen.
Bitte tragen Sie dies nicht weiter, aber da wir unser lokales Team haben, kennen wir auch all die Geheimtipps an sehenswerten Plätzen, welche nicht mit INTA Teilnehmern überfüllt sind.
So sehr unsere China-Anwälte, mich inbegriffen, an INTA hätten teilnehmen wollen, ging die Arbeit am Ende vor und wir werden nicht teilnehmen, sondern in China oder den USA sein.
Si va a estar en Barcelona durante INTA 2017, por favor háganoslo saber a través de un correo electrónico a la siguiente dirección: firm@harrisbricken.com y haremos todo lo posible para que uno de nuestros abogados se pueda reunir con Vd. Cuatro de nuestros abogados estarán en Barcelona a lo largo de la conferencia, entre ellos dos de nuestros abogados de nuestra oficina de Barcelona, Nadja Vietz y Joaquín Cabrera. Además de nuestro talento de Barcelona, asistirán también Mike Atkins (famoso por su Seattle Trademark Lawyer Blog) y Alison Malsbury (que habló en INTA el año pasado sobre marcas de cannabis).
Por favor, no se lo digas a nadie, pero nuestro tener una oficina en Barcelona significa que conocemos todos los buenos lugares para ir, incluyendo aquellos que no serán superpoblados con participantes de INTA.
Aunque nuestros abogados del departamento chino, incluido yo, quisiéramos ir a Barcelona para INTA, el trabajo prevaleció al final y todos estaremos en China o los Estados Unidos por la duración.

China M&A lawyersThe below is an email from one of our China corporate transactional lawyers to a client in the midst of dealing with a Chinese company interested in buying our client. Though it is from quite some time ago, I have modified it slightly to remove anything that might pass as an identifier. I pass it on because it shows a fairly typical issue that comes up when a Chinese company is seeking to buy a company overseas.

The response from the Chinese side is the normal endless negotiation approach. I doubt this is what you want, and your offer to [Chinese company made it clear this is not what you want. If you concede to their approach, your advantage is lost.

This happens often in company sales. It is not unique to China. The response depends on who is most desperate. Here is what we normally do in this situation where we are not desperate.

1. The buyer has two weeks to perform due diligence during the period required to draft an agreement.

2. If the buyer wants to extend due diligence into the period after the definitive agreement is executed, it can have an additional 2 weeks but only if they pay a substantial non-refundable earnest money deposit. “Substantial” means something like USD$ _____million or more. If they want another two weeks, it requires an additional non-refundable deposit. Chinese companies rarely agree to this kind of proposal, but if they truly believe they are onto a “good thing” (and it does appear they believe that here) they will likely pay for your company with no real due diligence at all. So you need to find out where you stand with these people.

To be clear: what the Chinese side is saying is that they don’t know anything about [client company_] and they don’t know whether they want to purchase you at all. Your position should be: [Chinese company] should be hot to purchase you or the whole project is a waste of time.

You have stated you are a terrific market opportunity for [Chinese company] and you are convinced [Chinese company] already understands this. If [Chinese company] does understand then they understand the price you are asking is a bargain and they should just pay it and be done. If they do not just accept this, you probably will need to meet with them face to face, which means key people from [Client company] need to go to China very soon to meet with the [Chinese company] players face to face. In that setting, you should understand that the Chinese company will likely be expecting you to give them a substantial price concession and so whoever travels to China on your behalf should have authority to agree on pricing; the people in China will want to negotiate with a decision maker, not a functionary.

Successful negotiations of company sales with Chinese entities typically work only if the company they are looking to buy both act like and truly do operate from a position of strength. This though means you must be willing to take the risk that [Chinese company] will walk away. The idea of a deal that is fair to both parties is for the most part foreign to Chinese companies. One side has to be on top. You need to be the side that is on top, even if that means [Chinese company] walks away. If you really believe you are giving [Chinese company] a rare market opportunity — and everything seems to align with this view — you have to believe you are “on top” and you do not need to sell to [Chinese company].

If you want, you can confirm immediately that your intent is to sell 100%. However, your offer document says just that. If they cannot read, then that is also a problem.

I note we had a similar situation here in Washington state for the sale of a company to a Spanish buyer. We took a hard line and the buyer walked away. Four months later, they returned and our client was sold at a very good price. The key was that our client did in fact own very valuable IP assets the Spanish company needed, so they came back. And when they came back we were able to say: now you understand we are not going to tolerate a low-ball price or any other nonsense; let’s just do the deal and be done with it. We did the deal in two weeks and we told all the investment banker vultures to get lost. But, the client had to take the risk that the Spanish company would never return. You may end up having to show similar patience here.

China licensing agreementChinese companies are seeking out technology wherever and however they can find it and our China lawyers have been writing a slew of China technology licensing agreements of late. Sometimes these deals come to us as China licensing deals, but other times, they come into our law firm as putative joint ventures, but after our China lawyers explain the difficulties and the costs involved in doing a joint venture our clients seek to restructure their relationship with their Chinese counter-party into a licensing arrangement.

We are big fans of China licensing deals because we have seen them be a financial stimulant for so many companies, including companies with admittedly outdated or “second tier” technology. China licensing deals can be win-win transactions because the Chinese companies and Chinese citizens get perfectly fine technologies (I presume) at a good price and the Western companies get a revenue source from a formerly moribund or nearly moribund technology.

The licensing deals our lawyers have been handling in the last year or so have mostly involved computer or industrial or medical technologies where the Chinese company wants to use the licensed technology to jump-start its own technology development. These Chinese companies initially plan to license the technology from our American or European clients as stepping-stone to building their own cheaper products in China and then later using that technology and the funds they receive from new product sales to further develop and refine (and perhaps even localize) the technology and their own products to compete better with Western companies on the high end. Sometimes though the deals are with a Chinese company that wants to put the technology to immediate use to improve on existing products they sell in China.

The below is a list of initial questions I pulled from an email (modified to eliminate anything that could possibly serve as an identifier to anyone) from one of our China IP lawyers to a client based on the licensing term sheet to which the client and the potential Chinese company licensee had signed off. The email posed some initial questions, the answers to which were necessary to allow this lawyer to being drafting the licensing agreement.

1. Territory:

a. For “China,” does this include Taiwan? Hong Kong?  Macao? These three jurisdictions all have an independent patent/trademark system. We do not use the term “China” in our agreements since it is not clear. We use the term PRC to refer only to Mainland China. Given the PRC’s aspirations, even that term is not perfectly clear. To which of these countries were you referring?

b. The term “Southeast Asia” has no precise meaning. Please identify the specific countries intended to be included. In particular, what is the status of Singapore, Indonesia, Malaysia, and The Philippines?

2. Note with respect to Territory. There are a number of separate issues:

a. Place of manufacture.

b. Place where patents/trademarks must be maintained.

c. Place where sales are permitted.

The three are quite distinct and it will be important we be clear on all three. It seems to me you are proposing the following:

a. Territory of manufacture is the PRC.

b. Territory of patents is PRC, Republic of Korea, Hong Kong and Japan.

c. Territory of sales is PRC, Republic of Korea, Japan, Taiwan, Hong Kong, Macao, Viet Nam, Thailand, Cambodia, Laos, Malaysia, Indonesia, Singapore and The Philippines?

Please advise on whether the above is correct? If yes, this will require some complex drafting. But it is doable.

3. Your statement of the license grant is a typical U.S. grant, which includes the right to sublicense. We though generally advise against giving a Chinese licensee the ability to sublicense. What is you position on this?

4. For a manufacturing license, we prefer to see our clients limit the Chinese side to manufacturing only in China at a manufacturing facility you the licensor have approved in advance. Do you agree with this?

5. This agreement is for two products. How do you want to deal with the trademarks and logos for both of these products? Will the patent license also include the associated trademarks and logos? What is the current status of registration of those marks in the applicable territories? Your controlling the trademark is a powerful way for you to control the right to manufacture and sell the products and if you have not registered your trademarks in the PRC and in the other countries in which they will be sold by your licensee, you should consider such registrations in connection with this project. Let’s discuss this.

7. In your Performance Metrics section, you raise the important issue of the obligation of [Chinese company] to pursue approvals in the appropriate territories and to engage in selling the two products in those territories. Note, however, that this is extremely complex. To list out just some of the issues:

a. What is the obligation of [Chinese company] to apply for and receive approval with respect to each of the countries in which you will be granting it the licenses? What happens if [Chinese company] receives approval in the PRC, but does not even try to secure approval in the other territories. What happens if [Chinese company] receives approval for Korea but not for the PRC? How are you intending for this to all work?

b. Is the stated sales goal just for the PRC or for the entire sales territory? Have you considered separate sales goals for each country?

c. What is the penalty to [Chinese company] if it does not achieve the performance metric. For example, what if they don’t even try for Korea? We could draft it so that you can either terminate the entire license or simply remove Korea from the territory. If the sales goal is cumulative, then you would terminate the entire license. But if the sales goal is by country, then you would remove the country from the license.

d. The same applies to your company. I doubt you mean that you must pursue patents in all of the countries listed. Am I right about this? Either way, we must be clear about this. We could perhaps clarify all this by providing for three territories:

i. Manufacturing territory: PRC.

ii. Patent territory: PRC, Republic of Korea, Hong Kong and Japan.

iii. Sales territory: PRC, Republic of Korea, Japan, Taiwan, Hong Kong, Macao, Viet Nam, Thailand, Cambodia, Laos, Malaysia, India, Indonesia, Singapore and The Philippines.

That said, we need to keep these various territories clearly demarcated.

8. In the performance metrics, you properly make clear that actively pursuing approval for sale is required for the license and you provide a hard deadline for one product. But since there are two products and as many as 15 different countries, this could get impossibly complex. We will need to provide a manageable way to keep track of two separate issues: the approvals to sell and the actual sales, for each product and for each country. There are many ways to do this. The simple way is to set an overall gross sales goal, without any specification of country of sales. If the sales goal is met, that’s the end of it. Then you can provide that if no approval is obtained for a particular region by a particular time for a particular product, you have the right to remove that country from the sales territory for that product. It seems this approach will work best but I would like to hear your thoughts on this.

9. Buy Back Right. It seems the buy back right for manufacture should only apply if [Chinese company] meets all of its obligations under the license. Do you agree?

Please consider the above and provide me with your comments and questions.

 

For more on what goes into a China licensing contract, check out:

China Licensing Agreements: The Extreme Basics.

China Licensing Agreements: Giving Your Technology a New and Profitable Life

China Difficulties, Netflix, and Why We Love Licensing

Nine Tips for China Licensing

Chinese companies in America

We are constantly writing about American and European companies that do business in China or with China without sufficiently recognizing that China isn’t Frankfurt and Chinese law is not British law and Chinese courts are not American courts. In other words, they may give lip service to the idea that they must operate differently in China than in the West, but they are not truly drinking that Kool-Aid yet.

But compared to Chinese companies coming to America, Western companies in China are the gold standard. The way many (most?) Chinese companies operate overseas give lawyers the shivers and ought to give everyone pause.

The following are just some of what our international lawyers have seen:

  1. Chinese company wanted to retain our lawyers to conduct due diligence on a quite expensive commercial building it was buying in California, but refused to pay our rates or any other law firm’s rates and ended up buying the building without a lawyer. We subsequently learned that the  amount they paid for the building nearly dollar for dollar matched the amount they would need to pay to clean up the environmental problems they apparently unknowingly bought along with the building, which pretty much any first year lawyer would have detected.
  2. We are getting countless American (mostly) employees (from CEOs to COOs to Sales Managers to in-house lawyers) at Chinese companies in the United States contacting us, almost pleading for us to “convince the head office back in China” to hire us. We don’t do that because it pretty much never works and even if it were to work, unwilling clients are not exactly what we want. In many of these cases the American (and sometimes European companies that contact our Barcelona office) employees are being told to use translations of Chinese language contracts for things as varied as employment contracts and sale agreements. Trust me when I tell you that using a Chinese contract in the United States makes about as much sense as using an American contract in China, which is none at all.
  3. The head of HR for the American operations of a Chinese company came to us to have us draft an employee termination/settlement agreement with one of its California employees, but the Beijing home office insisted the HR head (who had lived in the United States for only about five years) draft this without any lawyer help and she did. Two months later, the California employee sued the company alleging (100% rightfully) that the settlement agreement was invalid and seeking the full amount already paid to him to get him to sign the first settlement agreement, and more. The thing is this exact same thing has happened twice.
  4. We were involved in a fairly large lawsuit against a Chinese company’s foreign subsidiary and in an apparent effort to cut costs, one of the higher ups at the American subsidiary started emailing our client and in those emails saying things he never should have been saying. I have never seen an American or a European company go so rogue during litigation and I am convinced that the emails from this employee hurt the other side’s case and enabled our client to achieve a better settlement than we ordinarily would have.

I have plenty more stories, but only the above are old enough and common enough and can be told vaguely enough so as not to reveal anything the least bit secret.

But what spurred me to write this is the following paragraph I recently received from a very experienced and very international executive at a Chinese company’s U.S. subsidiary in response to my telling him that I keep planning to write something about Chinese companies overseas but that I really do not know what to say beyond talking about how they mostly seem to refuse to adapt.

When the Japanese companies came into the U.S. in the 80s, they started off with the same mistakes as we are seeing with Chinese companies. They tried to operate in the U.S. based on Japanese models. It did not work. So what did they do? They organized research teams, figured out the right way to operate, and on the second wave they did very well. The Chinese companies are completely different. When things don’t work for them they blame the foreigners within their own company. They do no research or thinking. They just double down on their failed strategy. So it is not clear what your post would say, other than to say that these Chinese companies are doomed to fail.

What are you seeing out there? Are Chinese companies adapting better to the United States and to Europe outside the legal arena? Are they really any worse than companies from other countries, or is it just a matter of time?

 

China LawyersLast year we did a five part series on the difficulties in getting money out of China. Since that time things have gotten a little better and a lot clearer. They have gotten better in that China seems to have eased off the brakes ever so slightly and they have gotten clearer in that experience has taught us the kinds of deals almost certainly to go through with money sent and those that have no chance, and what fits in between.

Our original post in this series, Getting Money Out of China: It’s Complicated, we wrote on how incredibly frequently Western companies have been needing legal help in an (often desperate) effort to get money out of China so they can get funds due to them on all sorts of deals. On our China Law Blog Facebook Page, I linked over to the original post and described it as “In which we begin to answer THE question everybody is asking.” That has turned out to be no exaggeration as that Facebook post alone has generated nearly 25,000 views. But as I noted in part 2 of this series, most of the interest in getting money out of China involves purchasing single family homes in the United States or in Europe and those deals are just not going to happen legally if they require money from the PRC.

In part 2, we discussed how the Chinese government seems to apply a three part test in determining whether to allow funds to leave China to go to a Western company. Based on the many deals on which our China attorneys have worked, and the reports we get from our clients and their bankers and financiers, and from China consultants and bankers and financiers with whom we regularly share information, we see legitimacy and benefit to China and deal structure as the three key elements. Part 2 focused on legitimacy. Part 3, focused on the “benefit to China” element and Part 4 on what is/was happening in China that is slowly down payments from China. Part 5, focused on increasing your odds of getting paid.

Since our five part series last year the flurry of companies trying to get money out of China to get paid has slowed down, but our having seen a bunch of the deals that failed have taught us the following two very important and not terribly related things:

Draft your contract with the Bank of China and the Chinese Government in mind. Two similar technology licensing deals. One has no Chinese version and talks about software that can be used to maximize retail sales. The other has a Chinese version and talks about how the software can maximize production line efficiencies. The second one has a much better chance of clearing Chinese government approval than the first one. It’s important that you get this right from the get-go because once you don’t, your odds of the money ever leaving have permanently decreased.

Draft your contract based assuming the money you need will never leave China. In other words, your contract should have a provision(s) making clear exactly what will happen if the funds never arrive.

For instance, if you are seeking equity funding for your company, you must not grant the putative Chinese funder equity in your company before you receive the money required. I know this sounds obvious, but trust me when I say that is not always the case. If you allow a Chinese company to get equity in your company before you receive the money, you will likely be facing the untenable situation of needing to sue (perhaps even in China) and argue for stripping the Chinese company of all equity for non-payment. Structure your deal so equity comes only upon payment!

Where we also often see problems is in licensing deals where the American or European company will provide some or all of its technology before receiving payment. As we wrote way back in 2011, in On Licensing your Software to China, this made sense well before China put the clamps on money leaving:

How do you plan to make arrangement for payments? I note that your normal system is 30 days net. In general, this is not a good idea in China the Chinese government has made it progressively more difficult for Chinese entities to convert RMB into dollars for payment to foreign software and service providers. The restrictions come in two forms: 1) unreasonable demands for contract registration and then delays and unreasonable documentation requirements for contract registration, and 2) imposition of withholding and other taxes, often in unreasonable amounts. All of these burdens must be met before the Chinese party is permitted to make payments. The demands and requirements vary from district to district and from bank to bank with no predictable pattern. This process can often delay payments for many months or even years.

Because of the above, it is not usually prudent in China to deliver software product or to provide services until after you have been paid or at least until after you have been paid for a significant amount of your fee. These payment problems are entirely beyond the ability of the Chinese customer to control, so even customers acting in good faith may be in a position where they cannot pay.

For more on why it always makes sense to get paid upfront when licensing your technology to a Chinese company, check out Three Myths of China Technology Transfers

Your Chinese Counter-Party Should Figure out how to get the Money out of China, not you. Our China lawyers are nearly always contacted by the American or the European side for help on getting their Chinese counterparty’s money out of China. This does not make much sense and our response is usually to tell them that my law firm’s role should be to represent the foreign party in overseeing what the Chinese party does to try to free up its own money and if the Chinese party is serious about wanting to get its money out of China, it should hire its own Chinese lawyer in China.  Guess what, if your Chinese counterparty is unwilling to hire and pay for its own lawyer to help it get the money it owes you out of China it must not want to pay you nearly as much as it claims.

China contract templatesI wrote last week on China contract templates in China Contract Templates: the Cons and the Cons. That post essentially stated that China contract templates range from worthless to dangerous. I put that post on Linkedin where it has received the following comments:

  • I could not agree more with your article. I suppose you should have also thrown in the often bragged about claim from business folks, that “hey, they signed our standard contract with no problems!” Great news! Maybe it is unenforceable against the Chinese party so of course they signed it!
  • Templates are easy to come by. They can cost you big, though, in the long run. I have seen a few such cases. Professional guidance is worth the investment!
  • Highlight: Going in-house as a ‘cost saving’ technique rather than because a team has any real China expertise can end up costing firms big time. It’s still surprising how many Western companies recognize China is a big step, but then figure they’ll learn as they go along without any major screw ups.
  • Been doing business in China for a very long-time. You are one of the few people I follow. This is because you consistently provide realistic quality advice. Everything you say about Liquidated Damages is 100% correct. Can’t emphasize this enough. However, it is very tough to get the Chinese side to sign and you must not capitulate on this term. This is coming from experience. I have been talked out of it a couple of times for various reasons and have been burned. Also, agree about diligence. If you are doing any long-term transaction requiring a significant amount of investment, you’d better make sure you know your Chinese partner. Figuring out the true ownership, power structure and financial condition of a Chinese entity can be very difficult. Thanks for the Great Read.

I also received an email from a lawyer friend who chided me for failing to provide specific real world examples of templates used to a company’s detriment. Great point. In Forum Selection Clauses. Do NOT Try These At Home, I talked about how my law firm had “made well over $100,000 the last couple of years fighting over badly written forum selection clauses in international contracts” and in all of those cases, the clients had drafted their own contracts using template provisions on forum selection. And as I stated in that post, “our clients (who consulted us for the first time only after they had signed these agreements and right before they were ready to sue on them) could easily have avoided the entire expense had they only done things right with their forum selection clauses in the first place.” The below are some of their mistakes dealing just with arbitration:

  1. One had a provision calling for arbitration before the Geneva Chamber of Commerce. Problem was that the Geneva Chamber of Commerce did not do international arbitration. In this case, our client had taken a contract my law firm had written for them and made a few changes and simply re-used it on another deal. The contract my firm had written had called for disputes to be resolved before the Arbitration Institute of the Stockholm Chamber of Commerce (at least I think that was what it said), which at that time (and today) was a very common forum for resolving disputes between Russian and American companies. So when my client went off and did an agreement with a Spanish company and the Spanish company refused to have the disputes handled in Stockholm, my client just switched “Geneva” for “Stockholm” and called it a day. Back then, the Geneva Chamber of Commerce did no arbitration. Zero. So when it came time for my client to pursue arbitration my firm’s arbitration lawyers had to conduct massive research to determine how even to commence arbitration before an arbitral body that did not exist. We ended up deciding to file with the Swiss Arbitration Association in Geneva, figuring we could argue that is what the parties meant and that arbitral body would want to keep the case. The opposing side vigorously contested our choice of forum and only many briefs and many dollars later did we prevail.
  2. A company once came to us with its “standard form contract” calling for all disputes arising out of the contract to be resolved by arbitration in the United States. This provision makes good sense sometimes and makes terrible sense other times and in the case they brought us, it made terrible sense and experienced international counsel would have instantly recognized why. Our client’s biggest risk would be non-payment by the company that was buying our client’s products. Korea is one of the best countries in the world to seize a defendant’s assets immediately upon filing your lawsuit, but we were concerned that we would not be able to do so in this instance, because the contract said all disputes needed to be resolved in the United States. When we tried to seize assets in Korea belonging to the opposing party, it made this argument to a Korean court. The Korean court did not buy it, at least not completely, as it allowed us to seize assets in Korea, but it also required us to post a much higher bond than usual for doing so. The other side made the same argument before the U.S. arbitrator, seeking damages from our client for having wrongfully seized its assets in Korea, rather than abiding by the contract that called for all disputes to be resolved via United States arbitration. We eventually prevailed there as well, by arguing that we were just seeking to protect any eventual arbitration award, not seeking to have anyone other than the US arbitrator rule on the merits. But we could have avoided all of this by explicitly putting into the contract the right to seize property as security, anywhere in the world.
  3. Then there is my all time favorite: the company that came to us with an arbitration clause that called for arbitration in South Carolina, in Chinese, under British law. When I talked about how much it would cost to get three Mandarin-speaking arbitrators to South Carolina (assuming the other side doesn’t argue for some other Chinese language) and the need to use two lawyers (one arbitrator and one lawyer fluent in Chinese) and the added costs of researching and arguing British law, they — wisely — chose not to pursue the case. When I asked them how they came up with such a provision they explain that they had taken it from one of their previous agreements. I didn’t say a word, but what I will say now is that a provision like this is a great way to discourage arbitration and sometimes that makes sense, but such a provision is a disaster if you are the one to sue. 

It is not just in arbitration provisions where disasters happen. Many years ago, I had a very large client that made vehicles and it at one point needed to engage in a large vehicle recall due to a defective part. The part had been provided to them by a small local supplier. The client sent me the contract between them and their supplier and it was incredibly unfavorable to me client; it essentially said that the small local supplier could not be held liable no matter how bad the product and my client would have to fund every bit of any recall. I asked my client why it had agreed to such a contract and they told me that they had used it because they thought it was very well written and it came straight from their largest and best and most professional part supplier. I said that the contract was exceedingly well-crafted and that was the problem: it was exceedingly well written to favor the part supplier and since my client was the part buyer, this should have been the last contract it should have ever used as a template for other suppliers. The recall cost my client millions of dollars and the company is no more.

I could go on and on….

 

 

 

China WFOE LawyersI was carbon copied on the below email the other day between one of our China lawyers and a client for whom we just started working on forming their WFOE. I am posting the below email because it nicely sets out the basic first pass of information we seek from our clients when forming a WFOE under China’s new WFOE rules, which came out on October 1, 2016. Please note that even this first pass email has been tailored a fair amount to suit the particular circumstances of our client and the city in which it will be doing business. Once we know the district, we will tailor the questions even more.

1. We will need to determine what business the WFOE will conduct in China. From your previous emails, it appears you have the following two alternatives:

a. Business consulting WFOE that will engage in providing basic support services to the U.S. parent of the WFOE.

b. Trading company WFOE that would engage in __________________ in China.

If you are uncertain about which of these options to choose, we will need to work with you to examine the 1.b. option. Please advise and we will work with you on that issue.

2. With respect to registered capital, China no longer has a strict registered capital requirement. What is required is that you provide enough capital to the WFOE to cover its expenses up until such time as the WFOE is fully up and operating and is able to earn enough income to cover its expenses without capital infusions from the parent. So the question on capital is: how much capital do you need?

To determine how much capital is required, you will need to generate:

a. Estimated costs for the first two years of operations.

b. An income statement for the first five years of operations.

You can prepare this financial statements in-house or in consultation with the accountant who will be providing your accounting services in China.

Of course, the financial statements for the WFOE will depend on the type of business you end up choosing for China. Financials for a service WFOE are normally quite simple. Financials for a trading company WFOE are considerably more complex.

3. In connection with 2 above, you will need to identify the sources of income for the WFOE. For a service company WFOE, it is normal for the WFOE to bill the parent for services in accordance with a standard service contract. Capitalization comes first, and then later payments from the parent are treated as service payments which are income to the WFOE. For a trading company WFOE, the income stream depends on the structure of the trading system.

4. It is normal to provide for the shareholder of the WFOE to be the U.S. corporate parent. For you that would be ________. Please therefore provide me with the following information:

a. Registered complete company name.

b. State of formation.

c. Registered address and business address (if different).

d. Copy of most recent information statement submitted to the state of formation (if any).

e. List of directors and officers of the corporation.

f. We are required to report the name of the individual who is the “actually controlling person” of the shareholder corporation. If the chairman of the board is also a shareholder, that person will be the actually controlling person. If not, we will need to designate someone who fits that role.

4. Before we can determine the precise rules for company formation, we need to know the district in which the WFOE will be formed. It is not sufficient to provide [name of China city]. We will need to specify the specific district within __________.

5. You will need to enter into a lease for the WFOE office. The precise lease rules depend on the specific district of formation. In general, however, you can expect the basic rules will require the following:

a. Two year lease.

b. Executed before the WFOE application begins. We will need to provide a formal address for the WFOE as part of the application process.

c. Some districts require the initial tenant to be the U.S. shareholder and some require the tenant be in the name of the WFOE.

d. Premises authorized to be used as an office for a WFOE and that is of sufficient size to accommodate the number of proposed employees.

6. Please state the number of employees for the WFOE for the first three years of operations. Please state the number that will be Chinese citizens and the number that will be foreign nationals. Please also provide job titles and basic salary ranges.

With respect to employees, it is my understanding that some or all of the WFOE employees are individuals who have worked for you in an independent capacity in the past. Do you want to treat their employment as a carry over from past work done, or do you want to start fresh with these persons? By carry over I mean do you want to carry over their past work history for seniority purposes? Since much of Chinese employment law is based on the number of years of employment this is an important issue and we may want to bring on our lead China employment lawyer to discuss all this with you.

7. You will need to determine a Chinese language name for the WFOE. WFOE names are complex because they have 4 components: ABCD. “A” is the location. “B” is the company name. “C” is the type of WFOE, which in your case will be either consulting or trading. D is the type of corporation: Company Limited in this case. What we need you to select at this time is “B”: the descriptive part of the name. You may wish to consult with your Chinese staff on the name. We can assist if required.

Please advise on the above. If you need more information to respond, please let me know.

After I hear back from you on the above, I will provide you with questions that will take us to the next layer of issues relating to the WFOE formation process.

China attorneyIn talking with a China lawyer friend recently, we got to talking about some common mistakes we see foreign companies making in their China deals. Among other things, we talked quite a lot about how foreign companies too often either fail to understand the need to conduct due diligence on their China counter-party, or have no clue about how to do so.

Two of the more common misunderstandings stem from China’s registered capital and personal liability rules and foreign companies oftentimes wrongly believe the following:

  • The amount of a Chinese company’s registered capital is the minimum amount of funds that company has in the bank at any given time.
  • Shareholders of Chinese companies are personally liable for the debts of their company.

Like I said, wrong on both counts.

Nearly all Chinese companies are limited liability entities. And though each Chinese limited liability company is required to initially put up a certain amount in registered capital, that amount very quickly becomes relatively meaningless for determining the company’s financial viability. The amount of a company’s registered capital can, with varying degrees of difficulty, be determined and that number can be at least somewhat helpful in giving you some read on the size of the company with which you are dealing. But once a Chinese company has been capitalized, there is no way to know what will happen or has happened to the capital. Even if all the registered capital was actually put into the business, it may or may not still be there. And even if the Chinese company still has all of its registered capital in a Chinese bank somewhere, the company might owe fifty times that amount in debt.

Shareholders are required to contribute to the company the amount of capital stated in the company’s registered capital and their failure to do that is a crime. However, there is still no way for a creditor to do anything with that in terms of pursuing an action against a shareholder. The limited liability designation in China means what it says and means what it means outside China: except maybe in extreme situations, the shareholders of Chinese companies are not liable for the debts of the Chinese company.

There is no infallible way to determine the credit-worthiness of any company with which you are looking to do a deal, much less one in China. But in China, like just about everywhere else, the best way is to conduct a full-on due diligence review of the company. That due diligence can and should include a review of the company’s registered capital, but that information should be just one small factor in any risk analysis you do on the company.

Be careful out there.