China WFOE A while back (I am being intentionally vague here to avoid identifying anyone) a U.S. client company contacted me about shutting down its China WFOE and/or terminating all of its roughly 20 China employees in one fell swoop. The U.S. company had discovered rampant corruption among its employees and its CEO wanted all of this to be done “by tomorrow.” I am not kidding!

My response (modified to hide any identifiers and ` into one email) was as follows, with the client identified below as “Company A.”

I spoke with Grace Yang (our lead China employment lawyer) and with Steve Dickinson (our lead China corporate lawyer) and both agree that there is no way we can provide you with anything even approaching sound advice by tomorrow.

You essentially have two choices. One, you slink away in the middle of the night and neither Company A nor anyone who China might ever identify as having been associated with Company A ever goes to China again and Company A never conducts any business with China again. If (as I pretty much know will be the case) this does not appeal to you, then you must provide prior notice to the government because what you are proposing to do almost certainly constitutes what China calls a “mass layoff.” We will need to confirm with the authorities that such notice will be required because the definition of mass layoff varies depending on the local labor bureau. But we are virtually certain it will be.

Once we know exactly the layoff situation with which we are dealing, we can work with you to figure out the best, the fastest, and the cheapest way to accomplish it. If you have any employees who are pregnant or any employees for whom this will present a significant financial hardship, this will get even more complicated.

In addition to the employee issues, you also will need to work with the government in shutting down the WFOE itself and that can be an even longer and more drawn out process than dealing with the employment issues. We typically bring in accountants to assist with WFOE closures because taxes are so central to this. We have worked with a couple of very good accounting firms in ___________[Chinese city] and we would want to bring one of them in for this closure. This is going to take a substantial amount of legal work on our part, gathering up the facts, researching the law, and meeting with government officials.

What I can tell you at this point is that how we handle this will very much depend on the facts. It will depend on the size of the WFOE (my client contact did not even know how many employees the company had in its China WFOE]. The reason for the layoff. The types of employees you have: some may need to be differently than others. The location. The economy in your location. The labor bureau office. Your company’s history. Your company’s plans for the future, including not just China but other countries. I could go on and on and I’m sure Grace and Steve can and would add many more things to this list once we get going on this. We have seen these sorts of terminations/shutdowns done right and we have seen these terminations/shutdowns done wrong and usually when they are done wrong really bad things happen, like people being held hostage in China or seized by the government when they go over there a few years later. When they are done right, they take a lot of thought and a lot of varied expertise and, most importantly, a lot of time.

If what you are proposing is a mass layoff — and we are virtually certain it is — there are certain procedures that must be followed, and those procedures vary by district, by city and by province. If it is a mass layoff, almost everything will likely need to be made public and the language used in the public notice thus becomes absolutely critical. The last thing you want is for your terminations to become this week’s big issue for labor activists. We will need to meet with the employee/union representatives or all of the employees to discuss severance. What can go wrong there? Well, one of the last times I was in Beijing, the talk of the town was an investment banker who went to meet with employees in a situation not all dissimilar to this, but without a plan. He was literally beaten to death. That’s obviously a rarity, but it does show the need to have a well thought out plan in place before doing anything.

The labor authorities will get involved and they have tremendous power to correct anything they think wrong with the WFOE’s mass layoff proposal. And the last thing you want to do is start out too harsh and thus anger them from the get-go. On the flip side, if we can win over the local labor authorities with a good plan, we can likely get them to assist in the whole process.

The above is mostly just the labor issues. Closing down the WFOE will have its own issues, mostly relating to first clearing up the labor issues, and any debt and tax issues. The tax issues tend to be worst of all because once a company starts closing, taxes start coming out of the woodwork. That is why we also will almost certainly want to bring in a high level yet local tax accountant. Oh and employees almost always file a claim against the WFOE regardless of how good a severance package they get; they nearly always think they deserve more. Which is why it will almost certainly be worth it for you to pay each of them enough to get each and every one of them to sign a settlement agreement in addition to everything else. I understand why you do not want to pay most of your employees anything right now, but it will probably end up making financial sense to do so.

Our China lawyers continued working with this company on a strategy and as time went on, their anger subsided and they chose not to shut down or layoff all of their China employees. But for anyone out there thinking of shutting down their WFOE or laying off all or nearly all of your China employees and needing some ultra-quick advice, the above should do, with the usual proviso that China’s laws on this sort of thing are always changing and always hyper-local.

China trade casesPresident Trump’s promises of tougher enforcement of U.S. trade laws has triggered the filing of an unprecedented wave of new antidumping (AD) and countervailing duty (CVD) petitions in the past few months. The U.S. already has many 397 AD and CVD orders in place, going back as far as 1977.  These orders cover 157 different products imported from 43 different countries. Most of these AD/CVD orders (by far) are on Chinese products, ranging from aluminum extrusions to xanthan gum. But just how effective are these AD/CVD orders? To what extent do these AD/CVD orders help certain domestic United States industries, but also harm other domestic industries? What kind of unintended consequences result from these cases?

To answer these questions, I look at one of the older AD orders: fresh garlic from China, which has been subject to AD duties since 1994. One reason why this order has lasted so long is because the domestic U.S. garlic industry has been able to show it would be vulnerable to material injury if the AD order on Chinese garlic were revoked. Gilroy, California may call itself the “Garlic Capital of the World,” but it is China that produces around  75 percent of the world’s garlic. China produces approximately 20 million tons of garlic a year as compared to the United States, produces around 175,000 tons. This disproportionality has allowed U.S. garlic producers to successfully claim they would be obliterated by a flood of cheap Chinese garlic were the AD order ever to be removed.

The vast majority of U.S. fresh garlic is grown in central California, but growing garlic there is getting tougher because of a tightening supply of land, labor, and water there. California garlic acreage planted is down significantly from 2000, and recent US garlic crops have been affected by white rot, a soil disease. Harvesting and packaging fresh garlic requires manual labor which has been hard to find, and likely will get even harder under Trump’s anti-immigration policies. California garlic growers face fewer available workers and increasing labor costs, as fewer people want to work on farms.  And as strip malls and suburbs creep towards farmland, property values are rising, making it even harder to find affordable housing for farmworkers. Garlic has also suffered from drought conditions in Central California for five years running and competition for scarce water resources has jacked up water costs for garlic growers.

The U.S. consumes about 260,000 tons of fresh garlic annually. After taking out the U.S. garlic used to make dehydrated garlic or as seed bulbs for the next garlic crop, U.S. garlic producers can now satisfy only about 30-40% of U.S. annual demand for fresh garlic. So, some imports are needed in the US market. Can AD/CVD laws effectively screen out unfairly traded garlic, while allowing in only the fairly traded garlic to fill the demand gap?

In the first few years after the AD order, Chinese garlic imports were completely shut out and U.S. garlic prices initially stabilized and then steadily increased. But by the mid 2000s, the US market price for garlic had risen so high that Chinese garlic could show they were selling at non-dumped prices even after absorbing initial AD duty deposits at 376%.

Between 2002 and 2007, the Department of Commerce (DOC) calculated zero or very low dumping margins for about a dozen Chinese garlic exporters. Not surprisingly, the volume of Chinese garlic imports into the United States increased, hitting about 72,000 tons in 2007. Since 2008, however, no Chinese garlic exporters have gotten any low AD margins calculated by DOC. More importantly, DOC has steadily knocked out Chinese companies that previously had low dumping margins, either by calculating higher updated margins in these later reviews or by applying the PRC-wide rate of 376% (or $4.71 /kg) because the responses from the Chinese garlic companies were deemed inadequate.

Out of all those Chinese companies that previously received a zero or very low AD margin, only one company, Zhengzhou Harmoni Spice (and their US affiliate, Harmoni International Spice), has been able to maintain an exemption from AD duties. This is because Harmoni worked out a deal with the California garlic growers (Petitioners) whereby Harmoni agreed to supply Chinese garlic to the Petitioners in exchange for the Petitioners agreeing not to request the DOC conduct another administrative review for Harmoni, which could result in Harmoni losing its zero dumping margin.  Some disapprove of such arrangements as an inappropriate gaming of the system that allows the domestic industry to manipulate the trade laws to its own benefit. But others view these as reasonable settlements that allow both sides to benefit in some way from the DOC not conducting a review.

In this garlic case, Harmoni clearly benefits as the sole Chinese garlic exporter with full access to the US market because it does not have to pay any extra AD duty costs or deal with burdensome DOC reviews. Petitioners also benefit by getting access to lower cost Chinese garlic they can use to supplement their own production and improve their overall profitability. Petitioners saw Harmoni as a “good” Chinese garlic exporter who would act responsibly in the market and not drive garlic market prices down, unlike all the other “bad” Chinese garlic exporters. Since 2004, Petitioners thus have not included Harmoni in their annual review requests that usually target all the other Chinese garlic exporters. Under US trade laws, DOC annual review requests can be filed by domestic producers, US importers for their own Chinese suppliers, and Chinese suppliers only for themselves; Chinese suppliers cannot request reviews for other Chinese suppliers.

The AD duties imposed on garilc increase costs that ultimately are borne by the consumer. But when fresh garlic costs are such a tiny part of your fettuccine alfredo, consumers are willing to absorb or are blissfully ignorant of those extra AD duties that inflate the price of garlic and the garlic wars are mostly being fought outside the public eye.

However, the cozy arrangement between Harmoni and Petitioners is now at risk of falling apart, depending on DOC’s upcoming final decision in the latest garlic administrative review. The other Chinese garlic companies, unhappy at being excluded from Harmoni’s arrangement with Petitioners, found a couple of New Mexico garlic growers to serve as “domestic producers” who last year filed requests that DOC conduct a review of Harmoni. Petitioners and Harmoni immediately pointed out that these New Mexico garlic farmers did not have standing to file the review request because they were not really domestic producers like the large scale commercial garlic farms run by Petitioners that account for about 80% of US garlic production. DOC disagreed and has accepted the New Mexico growers’ review requests and initiated a review for Harmoni. In December 2009, DOC issued a preliminary determination noting that Harmoni had not responded to the Department’s questionnaires and would receive the PRC-wide rate.

Harmoni and Petitioners, however, are still arguing that the review for Harmoni should still be terminated because the review request filed by the New Mexico growers was fraudulent and cannot be a valid basis for a DOC review. DOC has received numerous filings with sordid details of how the Chinese garlic growers and their US attorney planned to use the New Mexico growers just to undermine Harmoni’s arrangement with Petitioners. Late in this review proceeding, one of the two New Mexico garlic growers withdrew his support of the original Harmoni review request once it realized it was just being used as a pawn by the Chinese garlic growers. Harmoni has also filed a federal racketeering action that is still pending against the Chinese garlic companies and their US attorney for conspiring to defraud the U.S. government by filing false documents with DOC.

We will soon find out in DOC’s upcoming final determination for this garlic review whether DOC will accept or reject the New Mexico garlic grower’s review request and thus whether Harmoni’s arrangement with Petitioners will collapse or continue. But the fact that DOC has even preliminarily accepted this New Mexico review request highlights how DOC’s administration of the AD/CVD laws is so unpredictable that even the domestic industry cannot count on how these cases will turn out. DOC’s acceptance of the New Mexico garlic growers’ review request for Harmoni is particularly surprising because the Trump administration has been so unabashedly protectionist and DOC claims to administer the AD/CVD laws to protect the domestic industry from unfair trade.

The AD duties on Chinese garlic thus far have significantly restricted Chinese garlic in the U.S. market. In part because of the high AD duties, US garlic prices are among the highest in the world. Petitioners have been able to find a “fair” Chinese garlic company to help supply them with lower cost Chinese garlic, while still blocking all other “unfair” Chinese garlic companies. And yet, this arrangement that has benefited the domestic industry may come undone if DOC continues to accept the Chinese/New Mexico review request of Harmoni. Given the difficulties unrelated to Chinese garlic (rising land, labor, and water costs), the last thing the “real” US garlic producers need is an unfavorable decision from DOC that will shut down Petitioners’ access to “fair” Chinese garlic and open the door to “unfair” Chinese garlic returning to the U.S. market. DOC’s handling of this garlic review request issue demonstrates the US AD/CVD laws are blunt tools that are inconsistently applied by DOC and often result in unexpected and unintended consequences that do not help the domestic industry.

China employment lawyers
China employment law tips

If you take the time to understand and act according to China’s key employment laws, you can prevent many of the problems foreign employers typically face in China. Investing the time and money up-front is much less expensive than the alternative. These eight tips will help you stay on the right track.

1. Write employment contracts that spell out every aspect of your employer-employee relationship. Written employment contracts are the heart of China’s employment system. In the United States, employers can terminate employees at virtually any time and for virtually any reason. This is known as employment at will. The very concept of at-will employment is foreign to the Chinese and American companies often get themselves into legal trouble when they fail to adequately understand this significant difference between the two countries. As an employer in China, you must have written employment contracts with all full-time employees.

Employers that don’t implement written employment contracts are subject to penalties and administrative fines. More importantly, in the absence of a written agreement with your China employees, Chinese government officials may come to the conclusion that your employees have open-term employment agreements, which essentially means that the labor relationship has no definitive end date.

If an employer allows more than a month to pass (note that this period is shorter in some cities) without a written employment contract, the employer will be required to pay double the employee’s monthly wage.

If an employer lets more than a year go by without implementing a written employment contract, the employee will be considered to have entered into an open-term employment contract with the employer. Such a contract usually means the employer must retain the employee until his or her retirement age. After an employee has completed his or her probation period, it is very difficult to terminate the employee during the employment contract term. It is even more difficult to terminate an employee who is operating under an open-term contract.

2. Make sure all mandatory provisions are included in your employment contracts. China’s Labor Contract Law requires employment contracts to contain the following provisions:

  • Basic information about the employer and the employee (the employer’s name, address and legal representative or person-in-charge, and the employee’s name, address and national ID/passport number)
  • The specific term/duration of the employment contract (and any probation period)
  • Salary
  • A description of the work to be done by the employee
  • Location of the workplace
  • Working hours
  • Rest and leave time
  • Social insurance
  • Applicable labor protections, labor conditions and protection against occupational hazards
  • Other terms required by relevant laws and regulations

In addition to the required items, employers should include provisions describing any additional benefits they will provide to particular employees.

3. Clearly spell out the term of the employment contract and probation period. A probation period gives the employer and the new employee time to test each other out. Generally speaking, the longer the initial employment term, the longer the probation period may be. Typically, for employment terms of more than three months but less than one year, you may establish a probation period of no more than one month; for employment terms of more than one year but less than three years, the probation period cannot exceed two months, and for employment terms of more than three years or for an open-term employment plan, the probation period cannot be longer than six months. Each employee can have only one probation period.

Since it is difficult to terminate an employee after the probation period, we usually recommend an initial term of three years. That allows you to provide a six-month probation period (the longest permitted under Chinese law). Though it is fairly easy to terminate an employee during this probation period, it not as easy as widely believed. See China Employee Probation: All is NOT What it Seems.

Keep in mind that, in most cities in China, the employee will automatically be converted into an open-term contract employee when you rehire the person pursuant to a second fixed-term contract. Terminating an employee on an open-term contract is much more problematic than terminating one on a fixed term. By establishing a long probation period, you can delay the onset of the open-term period, so you can use this time to determine whether you should convert the employee to a lifetime employee.

As with most aspects of employment law in China, the general rule is just that; it is not the right option for everyone since every company is different, every employee is different, and, most importantly, China’s employment laws vary by jurisdiction. See China Employment Law: Local and Not So Simple.

4. Know China’s working hour rules. Most municipalities enforce an eight-hour workday and 40-hour workweek, which is called the standard working hours system. There are two primary exceptions to this system: the flexible working hours system and the comprehensive working hours system. The flexible working hours system is somewhat similar to the salaried employee system in the United States. It applies to certain categories of employees such as senior management and sales personnel. The specific categories of eligible employees are defined by local rules. The flexible working hours system can benefit employers who need greater flexibility and want to avoid paying overtime whenever an employee works outside the standard hours. Under the comprehensive working hours system, employers may have their employees work more than eight hours a day or 40 hours a week without having to pay overtime wages; however, the total working hours over a given period must not exceed the applicable limit under the standard working hours system.

For the most part, before implementing either a flexible working hours system or a comprehensive working hours system, an employer must secure prior approval from the local labor bureau and the approval is valid for only a limited time. You must submit a renewal application before the expiration of the term specified in the government’s approval letter.

Regardless of which working hours system you implement, it’s generally a good idea (to avoid paying overtime) to give employees the day off on Chinese national holidays, if at all possible.

5. Learn China’s rest time and vacation rules. Every employee must have two rest days, typically Saturday and Sunday.

Employees who have worked continuously for one year are entitled to paid vacation days. The statutory vacation period, based on the employee’s total years of service (with any employer, not just for you), is as follows:

  • More than 1 and less than 10 years’ service: 5 days of vacation
  • More than 10 and less than 20 years’ service: 10 days of vacation
  • More than 20 years’ service: 15 days of vacation

Employers are required to make arrangements for employees to use their vacation time each year. Unused vacation time in one year may be carried over to the next year, but not beyond that one year. An employer who does not allow an employee to take annual leave may be forced to pay that employee 300% of his or her daily wages for each unused vacation day. Chinese employees are very familiar with this law and they virtually always pursue the 300% owed to them (and more) when they leave a job.

6. Understand what you’re getting into before paying for a 13th month. Paying a 13th month of salary is customary in many parts of China, and it is typically paid out before the Chinese New Year. This is not required, but if you decide to do it, you will want to specify clearly and in writing the conditions for earning this bonus month of salary. If you’re not careful, you may end up having to pay this amount indefinitely.

Many foreign companies doing business in China have generously added this 13th month only after calculating their expenditures based on a 12-month system. If you are going to implement a bonus system for employees, you should clearly define its parameters in your employment contracts. For example, instead of paying a higher salary but no annual bonus, you may opt for a lower salary with an annual bonus, which is usually paid early in the following year. This will add no cost to you, but your employee can benefit from a lower individual income tax burden.

7. Factor in social insurance and housing fund payments. As an employer in China, you must contribute to social insurance (which usually includes pension, medical, work-related injury, maternity and unemployment insurance) and to the housing fund for all your employees. The exact type of required social insurance is determined by local rules. Whether this contribution must be made for your expat employees will depend on the local requirements at your (the employer’s) location. Some employers mistakenly pay for expat employees’ social insurance when they don’t have to, and others neglect to pay for their expat employees’ social insurance when they are required to do so. Both errors can be very costly.

8. Make Chinese your employment contract’s governing language. We recommend specifying in your employment contracts that Chinese is the governing language, rather than using a dual-language contract. Single-controlling-language contracts can help eliminate costly disputes related to differences in the two “official” languages. Such disagreements are practically inevitable with dual-language contracts. It also makes the terms of the contract clearer for both you and your employees. For the benefit of our clients who cannot read Chinese, our China employment lawyers virtually also create an unofficial English-language version as well.

China employment lawWhen it comes to your China employment law matter, you should keep the following three important precepts always in mind:

  1. China’s employment laws and its legal system favor employees over employers. As in most countries, the employer is presumed to be the more powerful party, so the law provides the employee with many protections. Among other things, this means that in most employer-employee disputes, the employer (not the employee) will bear the burden of proving what actually happened, and if the employer cannot prove it (usually with written documentation in Chinese) the employee will prevail.
  2. China’s employment laws cannot usually be modified by contract.
  3. China employment law is very local. What you can or cannot do in Shenzhen could be different from what you can or cannot do in Beijing. Before making any important employment move, you should check the rules for China, the rules for your province, the rules for your city and, in most cases, you should discuss with your local labor and employment authorities as well. Failing to do this is what causes foreign employers problems. See also China Employment Law: Simple Questions and Complex Answers.

This post is about how the second rule impacts China employee vacation days — an often-litigated employment law issue in China.

Let’s consider a hypothetical based on a question our China employment lawyers are often asked. A China employer’s Rules and Regulations provide that its employees are entitled to the statutory minimum number of vacation days and no carry-over of vacation time is allowed. Let’s further assume that the Rules and Regulations state that the employees have the responsibility to make sure they take all their vacation days within the relevant calendar year and they are expected to keep track of their vacation days. Lastly, the Rules and Regulations provide that if the employee fails to take all or part of his or her vacation time, the employee will be deemed to have given up all unused vacation days and cannot claim any compensation for such days. A disgruntled employee then sues the employer for 300% pay for all of her unused vacation days. The employer’s response is to refer to its Rules and Regulations and the fact that this particular employee signed an acknowledgment of receipt form acknowledging receipt of these Rules and Regulations and refuses to pay the employee anything on the basis that she knowingly and voluntarily forfeited all her unused vacation days.

The employer then asks one of our China lawyers what it should do.

When I or another of our China lawyers gets this type of question, the first thing we do is gather up more facts. What city is it? What does the employment contract actually say? Is it in Chinese (which makes it a lot harder for the employee to deny knowing what he or she signed) and a lot easier for the court to know what it says. What do the Rules and Regulations actually say and is that in Chinese as well? Most importantly, what is actually going on with this employee and this employee’s anger with her employer and what actually happened regarding vacation time. Many times the best way to resolve a loaded employee-employer dispute like this is to get both parties to step away, calm down and compromise, realizing that full-on expensive litigation is not in anyone’s best interest.

For purposes of the discussion here, however, I am going to assume a number of things, like the following:

  • The employer Rules and Regulations were lawfully implemented. In other words, the employer followed all applicable national, state and local laws with respect to its implementation. This means it gave its employees prior notice of the Rules and Regulations and it gave them an opportunity to comment on them.
  • The employer never made any arrangements for the employee to take her vacation time or if it did, it does not have contemporaneous written proof of this;
  • The employer never obtained a written request from the employee expressly stating that she would not take those days for personal reasons (i.e., reasons not related to the employer).

Before I give my analysis, let me first give you our loyal readers a super quick review of the applicable China law on vacation time: All China employers are required to provide their employees with paid vacation days based on each employee’s total years of service. Employers are also legally obligated to ensure their employees take their vacation days and to the extent an employer fails to do so, it must pay the employee an additional 200% of her normal wages for each unused vacation day.

So, what has the employer in my hypothetical above done wrong? The below is an non-exhaustive list:

First, the employer’s vacation policy in its Rules and Regulations is probably illegal because it shifts the employer’s obligation to the employee. I say “probably” because the law on this, like so many other China employment laws is very localized. The law says the employer must ensure all employees take their legally entitled vacation time and if that is not possible, the employer must pay the employee in lieu of the vacation days. Many jurisdictions in China very strictly interpret this law. The Western mindset that if you don’t exercise your legal rights, you waive or lose them does not comport with the legal reality here. It does not matter that the employee signed off on the receipt of the employer’s Rules and Regulations. The employee did not waive her rights to vacation time.

Even if the employer’s policy on vacation time were legal (which is not going to be the case just about everywhere in China), the employer (not the employees) should stay on top of tracking their employees’ vacation time. The employer’s failure to keep track of this particular employee’s vacation time, standing alone, would probably be enough for the employee to prevail in any litigated or arbitrated dispute. A laid-back management style does not work for China.

Second, the employer never obtained the employee’s written request expressly stating she would not take those vacation days for personal reasons. Of course, very few employees would go along with a voluntary forfeiture of their mandatory vacation days. If an employer is going to argue that one of its employees voluntarily relinquished her vacation days, the employer must be able to produce relevant evidence of this because the employer bears the burden of proving this. And without something in writing from the employee showing that she herself expressly requested that she be able to give up her vacation time, the employer is going to lose, and the employer’s Rules and Regulations and the employee’s signed acknowledgment of receipt form are not going to change this result.

Finally, suppose the employment relationship in the above hypothetical has been formally terminated and the employee has sued. The employer really should have dealt with this vacation issue before it got sued. China employees are getting increasingly serious about enforcing their legal rights under Chinese labor laws and this makes it essential that employers seek to resolve all outstanding issues between them and their employees before  termination. Otherwise, there is a good chance the employee will bring a claim for whatever issues are outstanding, including unused vacation time. A well-crafted termination/separation agreement will ensure that the employee will not and cannot come back seeking payment for unused vacation time (or whatever) and that if she does, the court will rule against the employee because the parties have a legally binding and enforceable agreement covering the issue.

Bottom line: Employers too often believe they have China-centric and legally binding Rules and Regulations when they don’t. They often also think they have great evidence against their employee(s) when they don’t. Employers often blame their employees for not doing everything the employers are supposed to do under China employment laws and this will mean the employer will almost certainly lose in any dispute regarding the contested issue. Still think you are in compliance with China’s employment laws? Maybe you should think again.

China employee probation
China employee probation: like a maze.

Employee probation periods has to be one of the most misunderstood issues in China employment law. Westerners just assume their probationary employees are at will employees who can be fired at any time, for good reason or for no reason at all. Wrong. The probation period is PART of the normal employment term and therefore pretty much all protections afforded to regular employees also apply to employees on probation as well. This period should really not even be called “probation” because it really isn’t. It was five and ten years ago, but no longer and your failure to realize this will be at your peril. Trust me.

Our China employment lawyers often are faced with situations like this: Employer hires an employee on January 1st with a two-month probation period. Employer then contacts us in late February to say it will be terminating the employee before the employee’s probation period runs out so it can avoid paying statutory severance. The employer’s reason for the termination is that the employee is “just not all that good” and they believe they “can do better.” The employee neither failed to follow employer directions nor did he or she fail to possess the qualifications required for his or her position. In other words, the employer has NO legal basis for terminating the employee. So with the probation period now coming to an end, can the employer go ahead with its planned unilateral termination without having to pay severance? Probably not.

The employer is shocked when we tell them that if they go ahead with the unilateral termination, they will be at risk of being sued for an unlawful termination. China is not an employment-at-will jurisdiction and the probation period is not an exception to this general rule. An employee termination during the probation period requires a legally permissible ground and except for the limited number of grounds permitted under the law, an employee on probation cannot be unilaterally terminated. If this sounds familiar, it should. Because if you replace the italicized parts with “during the employment term” you get the most fundamental rule of China’s employment law: a China employee cannot be unilaterally terminated without cause.

So under what grounds can an employer terminate an employee on probation?

Article 39 of the PRC Labor Contract Law provides that an employee on probation may be terminated with no severance for one of the following six reasons:

  1. The employee is proven to have failed to satisfy the conditions of employment during the probation period;
  2. The employee materially breaches labor disciplines or the employer’s rules and regulations;
  3. The employee commits a serious dereliction of duty or practices graft, causing substantial damage to the employer;
  4. The employee has established an employment relationship with another employer which materially affects the completion of her tasks with the employer, or she refuses to terminate such employment relationship with the other employer, after she is required to do so by the employer;
  5. The employee uses deception or coercion, or takes advantage of the employer’s difficulties to cause the employer to conclude the contract, or to make an amendment thereto, that is contrary to that party’s true intent;
  6. The employee has criminal liability imposed in accordance with the law.

Under Articles 40(1) and 40(2) of the Labor Contract Law, an employee on probation may also be terminated if:

  1. He or she has fallen ill or sustained a non-work related injury and, at the end of the medical treatment period, can neither engage in the original work nor in other work arranged by the employer;
  2. He or she is incompetent and remains incompetent after training or assignment to another post.

That’s IT. No law allows an employer to terminate an employee on probation for whatever reason the employer wishes (or for no reason at all) simply because the employee is on probation.

In addition, Article 21 of China’s Labor Contract Law clearly states that when an employer terminates an employee during the probation period, the employer must provide the employee with reason(s) for such termination. It is critical that the employer convincingly document its terminations in writing — in Chinese. If the documentation setting forth the grounds for termination is not convincing, you will be giving your terminated employee incentive to challenge the termination and a good chance of prevailing against you in a labor arbitration proceeding. This is especially true when the employer is a WFOE because let’s face it, China is always going to favor a Chinese employee over a foreign-owned entity.

The most common ground for terminating an employee on probation is the first ground under Article 39; the employer can prove the employee on probation does not satisfy the conditions of employment. Note the wording though in Article 39. The employer must be able to prove that its employee failed to satisfy the employer’s conditions of employment. For the employer to be able to prove this, it must have specified such conditions/requirements in writing and it must communicate those conditions to the employee beforehand. Though some courts will consider the general requirements in an employee’s specific industry as conditions of employment, most courts will not. What this means is that the smart employer has a clear writing setting out its probationary employee’s conditions of employment and if a termination becomes necessary, another clear writing documenting exactly how the employee failed to meet those conditions.

What then is the difference between a probation period and a normal employment term? Not much, actually. If an employer can prove any of the above grounds for termination exits, it can terminate the employee during the probation period without having to pay severance. Or the employer can wait until the end of its initial fixed term and not renew the contract but pay severance to the employee.

What then should you as an employer in China do? The best way to proceed is usually to specify the employment requirements in your employment contracts or in a separate agreement/document (in Chinese!) and preserve good evidence of how your employee fails to meet those requirements. If you as an employer want to be able to fully take advantage of the probation period, you should set out the conditions of employment in writing and provide those to the employee for review and sign off before the employment relationship commences. And then, as discussed above, if you find yourself wanting to terminate that probationary employee, you should give the employee a reason beyond telling them that “you are fired because you are still on probation.”

Few WFOEs seem to understand these rules and even fewer seem to get them right. Many try to manage their China-based employees from afar in a foreign (especially U.S.) style that does not work for China, without China-centric employment contracts or China-centric employer rules and regulations. These WFOE employers consistently fail to maintain records of employee behaviors/performances in a way they can later use in their favor in an employment dispute.

China employment cases are rife with examples of foreign employers that lost and lost big because they did not understand employee probation periods. Chinese employees know this and they are quick to sue when terminated during their probation period.

In a fairly recent case in Shanghai (which is actually more pro-employer than most cities in China), a foreign employer sought to have the court overturn a labor arbitration ruling finding the employee had been wrongfully terminated during the probation period. The employer argued that the employee was emotional at work, had on many occasions read magazines unrelated to work, and did not possess the professional skills expected for the job. The employer also argued the employee failed to pass his evaluations during the probation period. The Second Intermediate People’s Court rejected the employer’s arguments, noting that the employer failed to put forth any real evidence to prove an evaluation of this employee had actually occurred and it ordered the employer to pay damages to its former employee for unlawful termination of the employment contract.

Because employers in China must prove the grounds of termination even during a probation period and because there is no legal basis for unilateral termination the safest way for an employer to terminate its probationary employees is via a mutual termination agreement. This usually involves the employer giving the terminated employee a small severance payment in exchange for the employee’s voluntary departure. This mutual termination agreement should be in Chinese and it should include provisions making clear that the terminated employee is releasing the employer from any future claims. If the employee refuses to agree to such an agreement (this almost never happens), the employer essentially has the following two courses of action:

  1. Inform the employee that he or she is being terminated, and then sit back and wait for a potential labor arbitration, or
  2. Continue to employ the employee throughout the employment specified in the employee’s contract.

Can you extend the probation period? As is true of so much of China employment law, that depends on the locale. But this is not something you want to get wrong because in some locales, extending the probation period is just about the worst thing you can do. And keep in mind that even if your extending the probation period is legal, you as the employer still must prove cause for any eventual unilateral termination.

Bottom line: China probationary periods are neither what they used to be nor what they seem to be.  If you are unsure whether you are using your China employee probation periods correctly, now is the time to find out.

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.

 

China employee termination rules
China employment law: know the rules

Terminating a China-based employee usually requires good cause. A serious breach of employer rules and regulations can be a basis for an employer’s unilateral termination of an employee, but China employers have other options as well.

A China-based employer may terminate an employment contract if the economic circumstances which formed the basis for the parties’ having signed the employment contract in the first place have changed, causing the employer to be unable to perform under the contract. This sort of termination is permitted only after negotiations between the employer and employee have proven they are unable to reach an agreement on amending the contract. But does this sort of termination really work? As with just about everything related to China employment law that will depend on whether the employer handled the termination 100% correctly and a bit on the locale as well. See China Employment Law: Simple Questions and Complex Answers.

 Let’s look at an actual case out of Zhejiang province. The employer and employee signed an open-term employment contract in 2010 for the employee to work in a managerial position in Hangzhou. During the term of employment, the employer decided it needed to shut down the department this employee managed so as to cut costs. The employer provided its shut-down plan to its labor union for comments. The employer then notified the managerial employee in writing of its decision to close down his department and directed the employee to report to a new position, with pay and performance standards essentially the same as the managerial employee’s existing position. The employer’s notice clearly informed the employee that if he failed to report to his new position within a specified period, the employer would not be able to assign him to a similar position and would instead have to terminate his contract.
The employee refused to cooperate as directed and the employer then prepared a notice to terminate the employee’s contract and it provided notice to the company’s labor union for comments. The notice made clear the basis for the employee’s termination was the employee’s failure to abide by the employer’s new position assignment coupled with the employer’s inability to accommodate this employee with another similar position. These circumstances caused the parties to be unable to perform under the existing employment contract and after negotiations, the parties were unable to reach agreement on amending the original contract. The employer tried to serve the employee with his termination notice in person, but the employee refused to accept it, so the employer sent notice to the employee’s last known contact address by mail. The employer also published the termination notice in the daily newspaper and paid the employee an additional month’s wage as severance based on his years of service.
The employee sued for unlawful termination and demanded reinstatement of his position.

The courts sided with the employer and ruled as follows. After the employer decided to shut down the employee’s department and eliminate the employee’s original position, the employer provided the employee with notice specifying (1) his new position, (2) the new payment standard (which would not reduce his take-home pay one Yuan) and (3) the requirement that he report to his new position or be terminated for failing to cooperate. The employer also repeatedly asked the employee to report to the new position. The court held that the employer had handled the termination correctly and ruled entirely in the employer’s favor.

This case almost certainly would have turned out very differently had this employer not been so punctilious in following all the procedural requirements for a termination due to economic circumstances. This employer did not go full speed ahead and unilaterally terminate the employee right after it made the decision to eliminate his position. It instead got its labor union to sign off on its plan and then it sought to give the employee a similar position with similar pay.

Keep in mind that terminations because of economic circumstances require the employer pay their terminated employees statutory severance. And as always, it is important to check the local requirements before you terminate an employee.

 

US-China Trade WarThe Trump administration just launched two investigations to see if steel and aluminum imports threaten to impair the national security of the United States. Because these investigations were self-initiated by the Trump administration, many believe it pre-ordained that some type of import restrictions will be imposed. But here are a few reasons why imports should not be restricted, from China or from anywhere else.

Past Section 232 determinations indicate steel/ aluminum imports are not a “national security” threat. Only 26 investigations have ever been conducted under Section 232 of the Trade Expansion Act of 1962. Prior Section 232 investigations defined “national security” as covering not only a military or national defense component, but also the general security and welfare of certain industries “critical to the minimum operations of the economy and government.” Most (19 out of 26) resulted in either a finding of no national security threat or no action taken in any way. Only crude oil from Libya and Iran were found to be a national security threat that warranted some type of import restrictions.

The most recent Section 232 investigation concluded in October 2001 and it was also on steel. Even taking into consideration the national security requirements of the post 9/11 campaign against terrorism, the Department of Commerce (DOC) found that imported steel did not threaten to impair U.S. national security. In that report, the DOC found that the entire US military’s steel requirements was less than one percent of the domestic steel industry’s production capacity. DOC concluded (1) that the U.S. was not dependent on imported steel, and (2) that steel imports did not threaten the ability of domestic producers to satisfy any US national security requirements for steel.

Current steel and aluminum data are similar to those considered in the 2001 steel national security investigation. Only 30% of imported steel and aluminum was used in domestic consumption in 2016, showing a lack of dependence on steel and aluminum imports. Even if current US military requirements for steel have doubled from 2001 requirements, this would still be less than one percent of the 88 million tons of steel produced in the United States in 2016. The objective data shows steel and aluminum imports do not pose a threat to national security interests. National security should not be used as a pretense for protectionism.

Import restrictions would harm downstream US manufacturers. Additional tariffs, quotas, or other import restrictions may temporarily create a pocket of artificially higher U.S. market prices for steel and aluminum, particularly when compared to the lower prices in the much larger global market. This may provide a short-term benefit to US steel and aluminum producers who would have substantially less competition after import restrictions are imposed. But downstream US manufacturers who use steel and aluminum to produce cars, air conditioners, washing machines, airplanes, and a host of other industrial and consumer goods will either bear any increased costs and disrupted supply chains, or pass those increased costs down to the ultimate buyer/consumer in the form of higher prices. For every one US manufacturing job saved at a US Steel or Alcoa, sixteen US manufacturing jobs at a Ford, Carrier, Whirlpool, or Boeing, will be put at risk, because their foreign competitors would gain a cost advantage over them because of the import restrictions driving up the U.S. steel and aluminum prices they need to make their cars, air conditioners, washing machines or airplanes. The Trump administration specifically noted that shipbuilding, aircraft and vehicles may also become subject to a national security investigation. But any import restrictions imposed to protect the steel industry would adversely affect these other critical industries that may have to deal with higher steel and aluminum costs. The collateral damage caused by any Section 232 measures could be significant.

How do you distinguish “good” imports from “harmful” imports? Canada is by far the largest source of steel and aluminum imports.  A good number of Canadian producers are affiliates of US steel and aluminum producers. Chinese steel imports ranked 11th out of all 2016 imports and represented less than one percent of U.S. domestic production. The U.S. actually exported more aluminum to China (730,355 tons) than it imported (518,773 tons) in 2016. In the current 232 investigations, the USW has already asked that Canada be excluded from any import restrictions.  “China’s the problem, not Canada or other countries which are following the rules,” said USW President Leo W. Gerard. Presumably Canadian imports are usually considered among the “good” imports. But given the recent trade flare ups with Canada involving softwood lumber, dairy, renegotiating NAFTA, and border adjustment taxes (BAT), it is no longer a given that the Trump administration will give any preferential treatment to Canada.

Import restrictions would not address the real problem of Chinese overcapacity. Any threatened import restrictions would do nothing to reduce the China’s excessive steel and aluminum production capacity. Many of Chinese steel and aluminum mills are inefficient, debt-laden “zombie” state-owned mills that need to be permanently shut down. If China doesn’t cut its production capacity and instead keeps churning out steel and aluminum and selling onto the global market, China’s surplus production will continue driving global prices down. No matter how high the United States tries to build a tariff wall, these U.S. import restrictions will do nothing to address the key cause of global price declines for steel and aluminum.

Import restrictions may trigger retaliation. Section 232 import restrictions have been referred to as the trade “nuclear option“because it is so hard to argue against measures allegedly used to protect a country’s national security interests. If the U.S. invokes “national security” to protect its steel and aluminum industries, other countries will likely claim similar national security interests to protect their own allegedly critical industries from imports. For example, China could claim its soybean industry needs protection from imported soybeans that come primarily from the United States.

Despite the harsh campaign rhetoric during the Trump presidential campaign, Trump as President touted the recently announced “early harvest” deal with China as “gigantic” and “Herculean” and as a reset of US-China trade relations. Though the Section 232 national security investigation would appear to be the perfect forum for Trump to single out Chinese steel and aluminum producers for indiscriminate production expansion, it is now unclear whether Trump will do so lest he jeopardize the budding relationship he has developed with President Xi Jinping. If Trump does go after Chinese steel and aluminum imports based on national security grounds, it seems certain China will retaliate and find some U.S. industry to target with its own counter-actions.

If these Section 232 investigations result in import restrictions on all steel and aluminum imports, or even just on Chinese imports, there is a very real possibility the following lose-lose scenario will ensue:

  • steel/ aluminum prices increase, but not enough for the U.S. steel/aluminum industries to improve enough to recover or add any new jobs;
  • downstream industries that use steel and aluminum get hammered by increased steel and aluminum prices and lose sales to cheaper foreign imports from companies that still have access on the global market to lower priced steel or aluminum;
  • key foreign allies get harmed by restrictions on all US imports;
  • China and other countries impose their own national security import restrictions in retaliation against the United States.

I would much prefer the DOC and President Trump come to recognize this is a weak national security case. Labelling steel or aluminum imports as a national security threat is neither necessary nor supportable by the facts. President Trump could take more moderate actions that may be enough to claim political victory while avoiding retaliation from global trading partners.

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.