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China’s Hospital Sector Opening to Foreign Investment. Fools Rush In?

Posted in China Business
The below is a guest post by Ben Shobert and Damjan DeNoble, partners at Rubicon Strategy Group, LLC, a strategy advisory firm for healthcare companies going into China and Southeast Asia and the co-authors of HealthIntelAsia.com, a website dedicated to Asia and China healthcare business strategy. Ben also has a regular column on Forbes, where he writes about life science issues in Southeast Asia.

 

How much is a policy in China worth before it is implemented?

That is the question at the heart of the recent pilot pilot project announcement allowing for seven wholly foreign owned (WFOE) hospitals in three cities (Beijing, Tianjin and Shanghai) and four provinces (Jiangsu, Fujian, Guangdong and Hainan). On their face, these projects are going to create hospitals entirely owned by foreign investors.

Beyond the formal language of the pilot, however, what kind of system infrastructure is in place to support WFOE hospital structures?

China has a long history of instilling misplaced optimism regarding foreign investment into its health care sector, going all the way back to 1989, when the first liberalization of physician rights to practice outside of public hospital settings were tested, and the first calls for joint venture and cooperative joint venture hospital projects were sent out. To make a long story short, the optimism has for the most part been largely unfounded.

At the end of 2011 there were less than 100 foreign invested hospitals in China and, of these, these hospitals, less than 3% (2 hospitals total) are classified as general hospitals, compared to 61% of Chinese-owned hospitals being classified as the same. Moreover, more than half of the hospitals had investments of less than USD 2 million, while those with investments of more than USD 10 million accounted for only around 10% of the total. See China healthcare joint venture and WFOE policies and regulations where we wrote about how in 2012 widespread optimism about an opening up to foreign healthcare investment had been quashed.

China currently allows foreign investors from Macao, Hong Kong and Taiwan to wholly own a China hospital but the results of that partial opening up have been inconsequential. Until recently the only foreign hospital WFOE was Landseed International Hospital, a Shanghai 100 bed facility set up by Taiwan’s Landseed International Group, about which its superintendent admitted had managed to “roughly” break even and that due to high investment costs and low returns, Landseed is still the only Taiwanese company to set up a fully owned hospital in China since 2011.

You may at this point be asking, why is a developed legal structure to develop WFOE hospitals is important given that despite the virtual lack of governing principles in the past, foreign investors were still able to set up close to 100 hospitals that didn’t close down within a short time of their establishment? Furthermore, even though these hospitals are only covering costs or being mildly profitable in the short term, isn’t China always being sold as a long term play by sophisticated China commentators?

Foreign joint venture companies generally face similar difficulties. Even Chindex, probably the best known and most respected foreign investor in Chinese hospitals, recently cited the following reasons for deciding to sell the company:

  • The risk of relying on Company forecasts given the Company’s track record on failure to achieve projections.
  • The uncertainty of the legal, regulatory and business environments for healthcare service companies in China.
  • The risk of not being able to obtain financing for expansion plans.
  • The company’s prospects in the absence of being able to move forward with its expansion plans.

The uncertain “legal, regulatory and business environments” to which Chindex referred likely include the fact that foreign invested hospitals typically operate in a tangled, undefined network of competing central level government organs and ministries and local and provincial government bodies.

With all the difficulties foreign hospitals face in China, foreign investors have been and will continue to be reluctant to invest sufficient funds to make foreign hospitals competitive in China, notwithstanding the recent announcement regarding WFOE ownership of China hospitals.

In part II we will discuss prudent strategies for Western companies looking to make a healthcare play in China, including the benefits of entering China’s healthcare market now, as opposed to waiting “until things get better” later.

Identifying Your China Risk Factors

Posted in China Business, Legal News

China is in the midst of what appears to be a concerted government crackdown against foreign companies doing business in China. This has led many of our clients to ask themselves (and our China lawyers): “Are we at risk, and if so, how much risk?” Our quick answer is always “yes.  Hard to say.”

The risk usually depends on all sorts of factors, including the following:

1. How does the Chinese government categorize/view your China business’s industry?If your China business is in a restricted industry or one in which China’s citizenry has major concerns (food and medicine are classic examples), your risk is almost automatically high. If your China business is in an industry that requires you to joint venture with a Chinese partner, your risk is also almost automatically high. Ditto if your business is in an industry the Chinese government views as its own province, such as SAAS, cloud computing, the internet, publishing, and telecom. Andrew Hupert at ChinaSolved makes a similar pointwhen he notes how China’s “bureaucracy is much more tolerant of overseas companies that spend than of overseas companies that earn in China.”

2. Do the Chinese people consider your industry to be their government’s responsibility? Health care and education immediately spring to mind and we have had a number of our clients in those two areas have been subjected to intense government scrutiny for activities that probably would have been ignored in other industries. See GSK (not our client).

3. Does your China business rely on cleverly written contracts designed to get around China law? Chinese courts generally do not look kindly on companies that do this. As noted by our own Steve Dickinson in a recent article, “Chinese law contains a clause that deems all contracts concealing illegal intentions in a lawful form; to be invalid.” As your China business has only void contracts to rely on, the risk of this type of arrangement is high. If you are in China via a VIE (quasi alliteration intended) you have been warned.  See China VIEs. Avoid, Avoid, Avoid.

4. Do you know what your Chinese staff are doing? As much as we hate to say it, but virtually every instance we have seen of foreign companies getting into trouble in China involved a foreign company that gave too much leeway to its Chinese staff. This alone increases your risk as there is an inherent conflict in that your Chinese staff will want to do things the “China way” but you will be judged by the government against the “foreign standard.”  For more on this, check out the following:

5. Ultimately, what is the culture of your China business? Are you relying on “strategic” relationships to work around the letter or even the intent of China’s laws? Do you know well those with whom you are doing business? Are things happening at your company that make you uncomfortable? Do you feel like things are happening at your company behind your back? If you answered “yes” to one or more of these, you are probably at high risk.

If you are serious about mitigating risk with your China business in the current environment, get serious about compliance by doing what you can to improve your answers to the above questions.

UPDATE (by Dan Harris): My long-time friend Jeremy Gordon will on October 1 be coming out with a book, entitled, Risky Business in China: A Guide to Due Diligence.  I have talked enough with Jeremy about his upcoming book, seen enough portions of the book, and also worked enough with Jeremy enough to be able to guarantee this will be a great book and to urge everyone to buy a copy. Amazon describes it as follows:

Risk is a major reason that companies fail in, or fail to enter, China. This unique book demonstrates how correctly-applied due diligence can not only reduce business risk in China, but also provide excellent business intelligence to support negotiations and business relationships. Based upon the author’s twenty years of consulting experience in China, this practical book is packed with real-world case studies of failures and successes, providing a valuable and detailed ‘road map’ to avoiding the most high-profile pitfalls of business in China.

I believe it.

Shanghai Free Trade Zone. Still A Yawn.

Posted in China Business, Legal News

Gabriel Wildau of the Financial Times, recently wrote an article nicely summed up by its title: Shanghai free-trade zone struggles to live up to its hype.  She starts her piece by saying that “the disappointment is palpable, with scant progress on loosening capital controls or liberalizing interest rates.”

Even those who have gone into the zone seem unable to extol its benefits and discuss it in terms of “hype” not benefits:

Even US ecommerce group Amazon, which last month announced plans to open a logistics warehouse in the zone, was vague about the benefits of operating in the zone beyond geographical proximity to consumers.

Few people expected immediate breakthroughs on financial reform. However, the near total lack of substantive changes has led to cynicism among bankers.

“It’s been mostly hype so far,” said a loan banker in Shanghai who works with small and medium-sized companies in the zone. “Nothing has really changed.”

*   *   *   *

Investors deserve some blame for buying into the hype. Chinese policy makers have maintained a resolutely cautious approach over the past two decades to any financial reforms that could potentially destabilize the economy.

This very much corresponds with what we wrote about the Shanghai FTZ in The Shanghai Free Trade Zone. Yawn. In that post, we had this to say about the Zone:

I was talking with a China lawyer based in Beijing the other day and at one point he mentioned that he had recently been to a talk on Shanghai’s Free Trade Zone. When I asked what he had learned from that talk, he said something like the following:

Three people talked about the FTZ. One person from a big accounting firm, one from a big law firm, and one from the FTZ itself. They all essentially talked about how great it was and about how great it would be but really, neither I nor anyone else there with whom I talked could figure out one concrete reason why to bother with it.

I thought of that today after receiving a link to a [previous] Financial Times article that pretty much says the same thing. The article is entitled, Benefits of Shanghai free-trade zone still shrouded in mystery, and it pretty much says exactly what my lawyer-friend said. That a bunch of people with an interest in seeing the Shanghai FTZ become something important are out there proclaiming its importance, but when pressed on why it is important, they have no answer.

I am also reminded of a friend of mine who is in-house counsel at a very large tech company in China who is always getting calls from people at his company complaining that their company isn’t doing more with the Shanghai FTZ, especially in comparison to other foreign companies. My friend says he responds by asking what more they should be doing and what exactly other companies are doing that is leaving his own company in the dust. He says that these questions produce either stammering or silence and he has yet to receive a real answer.

Shanghai’s FTZ, what is it good for? Absolutely nothing?

China Product Development Contracts: The Questions We Ask

Posted in Basics of China Business Law, Legal News

We often write on how foreign companies outsourcing their product manufacturing to China need an NNN Agreement (in Chinese), an OEM Agreement (in Chinese), and their trademarks registered in China. For most companies seeking to manufacture product in China, those three are enough.

But for those foreign companies that do not have a finished product ready for manufacturing, a fourth item is oftentimes needed: a product development agreement. If you are going to work extensively with a Chinese manufacturer to develop a new product, you probably are going to need a product development agreement. These agreements cover the cost and procedure for developing a product. Many companies fail to enter into this kind of agreement only to discover later that the Chinese side owns “their” product IP or the molds or the tooling at the end of the process.

And what better way to give you a better idea of the sort of thing that should go into a China product development agreement than to list out the initial set of questions our China lawyers typically ask our clients to gather the information needed for drafting such an agreement. Those questions are as follows:

1.    Scope of Work

  • What products will this development agreement cover?
  • Will there be a formal timeline with specific milestones? If so, please describe the timeline and the milestones in as much detail as possible, including prototypes, the evaluation process and any required certifications.

2.    Development Costs and Budgeting?

  • Which party will pay for development, design and engineering costs?
  • Which party will pay for tooling and molds?
  • Which party will pay for supplies and equipment?
  • How will costing and approval of such expense items be handled?
  • Will a formal development budget be drafted? If yes, how and on what schedule?

3.    Development Proposal

In what form will the development proposal be provided to the Chinese side? A general concept? Detailed drawings? A physical sample? Consider the following two extremes. In some cases, the foreign side simply has a very general idea of a product, perhaps just a sketch. In this case, the Chinese side will work with the foreign side to develop the product “from scratch.” At the other end of the scale, the foreign side has a fully developed working prototype and the issue is merely whether the Chinese manufacturer can make the product at a certain price and quantity?

4.    How will the target for the final product be determined? Will a target of price, quantity, timing of delivery be set in advance, or will this be worked out during the development process?

5.    IP Issues

  • Which party will own the IP created during the development process (including physical items such as prototypes and tooling)?
  • Will the Chinese side have any restrictions on its use of the IP created during the development process, manufacture of similar products?

6.    Relationship of the development agreement to the subsequent manufacturing agreement/OEM Agreement

  • If the Chinese side meets the targets/milestones, will you still need to enter into an OEM agreement with them for the manufacturing of the developed products?
  • If there will be an OEM agreement, will it be an exclusive one? For example, can you go to another Chinese manufacturer? Can you go to a manufacturer in another country? Can you manufacture the product yourself in the United States or elsewhere?
  • What happens if you decide not to manufacture the product at all?
  • What if you use another Chinese manufacturer?
  • What if you abandon the project entirely? For example, in a recent product development agreement we drafted, the parties agreed that if the Chinese side met all of the requirements of the agreement and yet the foreign side still decided not to go forward with actual production of the product, the foreign side would be required to pay a fee to the Chinese side.

China Compliance: The Mooncake Version

Posted in Basics of China Business Law, Legal News

The Mid-Autumn Festival is coming and mooncakes will soon be given to Chinese family, friends, and colleagues to demonstrate appreciation for these individuals’ generosity throughout the year. Most will exchange delicious mooncakes during the Mid-Autumn Festival with the purest of intentions. However, the holiday also provides an opportunity for individuals with less admirable intentions to corruptly curry favor with influential political and business contacts through extravagant and valuable gifts.

Keeping with tradition, individuals trying to corruptly influence others may gift mooncakes in expensive tins or containers in order to impress officials and win favor. Others may go the less culinary route and gift mooncakes made of precious metals or stones. Still others may break (?) with tradition all together and provide gifts of valuable goods or cash (sometimes inside the mooncake), in an attempt to win influence.

China is aware of and attempting to address the “mooncake corruption” issue. Focusing efforts on public servants, China’s Central Commission for Discipline Inspection and the Communist Party’s Central Committee warned government officials of using public funds to purchase luxurious mooncake gifts. It has even created a new website to report those who do.

Companies operating in China should never waste opportunities to enhance compliance initiatives. The Mid-Autumn Festival and the Chinese Government’s “Mooncake Anti-Corruption Measures” provide companies in China a unique opportunity to instruct their company officials and employees – as well as their Chinese vendors, customers, and agents – on the very real corruption risks that China is clearly and publicly addressing. The Mid-Autumn Festival’s gift-giving focus also provides an instructive backdrop for companies to assess their efforts to ensure they are appropriately complying with Chinese and other countries’ applicable laws and regulations that may impact their Chinese operations:

  • Does the company have a Compliance Officer, a Compliance Group, or an employee that generally reviews the company’s compliance with legal and regulatory requirements?
  • Does the company have corporate compliance and ethics policies that are distributed, discussed, and enforced with its employees and agents?  Are they written in the language or languages that its recipients truly understand?
  • Has the company implemented procedures that address such issues as reporting compliance concerns (e.g., gift giving)?

China’s Mid-Autumn Festival provides a good opportunity to address company compliance concerns. And a company meeting to discuss compliance issues provides a great opportunity to share mooncakes with your colleagues.

China Employee Probation: Don’t Let It Slip Away

Posted in Basics of China Business Law, Legal News

In China, employment contracts for new employees often include a probation period  (试用期) designed to give the employer (mostly) and the employee time to test each other out.

Generally speaking, the longer the initial employment term, the longer the probation period may be. However, the length of the probation period is not without limitation. Under China’s Labor Contract Law, for employment terms of more than three months but less than one year, you may set 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 arrangement, the probation period cannot be longer than six months.

Chinese law, however, does not allow any probation period for the following three types of employment arrangement:

  1. employment of a part-time employee
  2. employment with a term of less than three months
  3. employment whose term is based solely on the employee completing a certain task.

Note that you may use only one probation period for the same employee. In other words, you may not set another probation period for the same employee upon renewal of his or her labor contract. Any failure to follow the rules above will subject the employer to administrative and/or civil liability.

If you are an employer in China, you should take advantage of the probation period to review your employees performance to make sure they are indeed a good fit for your organization. If, by the end of the probation period, you do not wish to extend employment to an employee, you can relatively easily terminate the employee before he or she begins the standard employment term. Under China’s labor laws, employers can unilaterally terminate employees that do not satisfy the conditions of employment during the probation period without having to make any severance payment to the terminated employee. For new employees, our China lawyers generally recommend an initial employment term of three years and a probation period of six months (i.e., the longest probation period possible). We advise our clients to take the probation period seriously so no employee is taken beyond the probation period unless it is certain he or she will work out. Once the employee has completed his or her term of probation period, termination requires good cause and a severance payment. For what is involved in terminating a China employee not on probation, check out How To Terminate China Employees. Oh, And Be Sure To Pay Them.

During the probation period, the wages paid to your employees on probation cannot be lower than 80% of the lowest wage paid to other employees at the same position at the workplace, or 80% of the wage during the probationary employees’ standard employment term. The wages paid to an employee during the probation period also must meet the local minimum wage requirement and you as the employer must provide all applicable benefits to the employee, including safe working conditions, necessary labor protection, normal rest time and vacation, and social insurance.

Bottom Line: Terminating Chinese employees not on probation is usually difficult and expensive. It therefore nearly always makes sense to take advantage of a probation period when hiring a new employee.

Why Russia’s Current Situation Is Eminently China Relevant

Posted in China Business

Though it is Labor Day, it is also a Monday and on Monday mornings I like to map out what will likely be going on during the upcoming week both for my law firm and me. And I just realized how much of this upcoming week is going to involve Russia.

Many years ago, my law firm had a booming Russia practice. We represented American and Russian companies doing business together in industries such as fishing, mining, timber, energy, finance, and transportation.  9-11 led to a decline in this business as it caused the Russian Far East to look much more to Moscow for assistance and much less to the United States. And right around that time, our China practice started accelerating, which led us to shift our emphasis from Russia to China.

But Russian issues have recently accelerated as many of our China clients (and some of our old Russian clients) are contacting us in quasi-panics.  We find ourselves engaged in the following sorts of work:

  • Helping our clients decide if what they are doing in Russia violates any U.S., European or Canadian sanctions.
  • Fighting on behalf of U.S. and European companies over who is responsible for the loss of deals halted by either U.S. or European sanctions or by Russia’s own embargoes against certain goods from certain countries. We find ourselves discussing more and more the deeper meaning of various Incoterms and of legal concepts like force majeure, rescission and restitution.
  • And the latest are panicked (and panicked is probably an understatement) emails from companies who have read about proposed new sanctions that might include cutting Russia off from the SWIFT payment network. These companies are rightly afraid that this may mean that Russian companies that owe them money may have no way to pay. On the flip side, it may mean that the American and European companies that have product on order from Russia will never get it because the Russian side of the transaction will not send it for fear of not getting paid.
  • Russian companies seeking answers to what they can do in the United States, legally, so as to avoid massive disruptions to their operations because of the issues above.

Why though am I writing about Russia on this, a China Law Blog? Two reasons. One is that most companies that do business in China do business internationally and for many that includes Russia. But really it is because it strikes me that nobody (myself included) thinks enough about issues like the above when doing business with China. I am NOT saying that we are on the verge of a situation with China similar to what is going on with Russia, because we are not. But I am saying that it would not hurt to at least think about that possibility and start laying the groundwork now.

Just by way of one salient example: many of the China documents we see (before our China lawyers get to revise them) are either hopelessly vague as to when title of goods passes and as to who is responsible for non-delivery of goods. Even worse, some of those documents clearly provide that the American or European company gets no refund of payment if the Chinese supplier cannot produce or ship product due to a force majeure event. If you take the time now to put just these sorts of things in order in your documents with your China supplier or even with your insurance company, you might end up saving your company millions of dollars down the road.

And if you have been thinking about utilizing a China plus one strategy to diversify your supply chain, maybe now is the time to actually get going on that plan.

Just saying….

China Joint Ventures That Work

Posted in Basics of China Business Law, China Business, Legal News

China joint ventures are notorious for their high failure rate. An old Chinese saying that is often applied to joint ventures is “same bed, different dreams.” This Chinese saying (同床异梦) actually far predates joint ventures — it applies to any sort of partnership without a meeting of the minds.

Far too often, American companies and Chinese companies rush into joint ventures without ever discussing their respective dreams.

Many years ago, a client about to fly to China to meet with a potential Chinese joint venture partner asked for our help in formulating questions to ask of the Chinese company to help determine whether to enter into the joint venture deal. We provided a list of issues to raise at that meeting, and have provided a similar list (honed a bit more each time) to subsequent clients facing the same situation. The goal of raising these issues is to determine whether the two companies share the same dreams, and whether the Chinese company is JV worthy. Currently, this list includes the following questions:

  • Why are you seeking to form a joint venture with us and what will be the goals of the joint venture?
  • What will you do for, and with, the joint venture?
  • What exactly do you plan for your company to be doing to advance the business of the joint venture and what exactly do you expect our company will be doing to advance the business of the joint venture?
  • Who will make business decisions for the joint venture, and what will mechanisms will we use for reaching a decision?
  • What will each of us be contributing to the joint venture? For instance: property, technology, intellectual property, money, know-how, and employees. If the joint venture loses money, who will be responsible for putting more money in?
  • How will we resolve disputes? China lawyers like to include provisions saying that we will work out any issues among ourselves and if that fails, we will arbitrate. The tougher question is: how will we deal with day to day disputes in a way so that the joint venture does not collapse?
  • Can either of us use confidential JV information for our own business? Can our own businesses compete with the JV? Can our own businesses do business with the JV?
  • How and when will the joint venture end? What if one of us wants to buy the other out?

Posing these questions puts the dreams to the test.

For more on China joint ventures, check out Joint Venture Jeopardy and Avoiding Mistakes in China Joint Ventures

China Employment Offer Letters: Be Careful.

Posted in Basics of China Business Law, Legal News

In China, an offer letter (录用通知书) is a written document delivered by an employer to an employee stating the employer’s intent to enter into a labor relationship with the employee. An offer letter typically proposes the employee’s work title, work location, wages, and the term of the employment arrangement.

Despite the relatively common use of employment offer letters in China (especially by state-owned enterprises) no Chinese law specifically addresses them. For that reason and for the reasons set forth below, employers should be careful in using them.

To begin with, despite what many believe, offer letters are not an official labor contract and they do not satisfy the requirement that labor contracts be in writing. Under Chinese law, an offer letter is regarded as an employer’s unilateral act expressing its willingness to enter into an employment relationship with a potential employee. An offer letter is deemed to be an “offer” (要约) and it is governed by China’s Contract Law, not by China’s Labor Contract Law. A labor contract is a legal document evidencing the existence of a labor relationship between the employer and the employee but an offer letter has no such effect. So even when the employee returns a signed offer letter, the employer must nonetheless execute a formal labor contract with the employee within one month after the employee begins working for the employer to be in compliance with Chinese law.

Under China’s Labor Contract Law, an employer can be required to pay its employees twice the employees’ monthly salary if it fails to execute a written labor contract within one month of the commencement of the employment relationship. Further, if the employer goes  more than a year without having a written labor contract with an employee, the employee lacking the written labor contract will be deemed to have entered into an open-term labor contract with its employer, which essentially means there is no definitive end date to the labor relationship.

Nearly all of the offer letters our China lawyers have reviewed made statements violating PRC labor laws. This alone generally makes it a bad idea to refer to the offer letter in any eventual labor contract. But on top of this, nearly all of the offer letters we see also usually also contain terms that conflict with the labor contracts and/or other employment agreements such as the employer’s rules and regulations.

When an offer letter makes sense for our clients, we usually recommend that they insert  a provision in the formal labor contract (in Chinese, of course) explicitly providing that  the labor contract supersedes the offer letter.

In conclusion, if you are going to use an offer letter, you should, at minimum make sure of the following:

  • It does not violate any PRC laws.
  • You have a written labor contract with the employee to whom you sent the offer letter.
  • Your written labor contract clearly provides (in Chinese) that it supersedes the offer letter.

China Joint Ventures: A Warning

Posted in Basics of China Business Law, Legal News
The most common ways that companies start doing business in China (legally) is by forming a WFOE (A Wholly Foreign Owned Entity) or by partnering with an existing Chinese business through some form of joint venture. Media reports to the contrary, China remains  quite open to foreign investment and in the past several years WFOEs have become the most common vehicle for foreign investment, partly because of investor skittishness as stories about problems with Chinese equity joint venture partners have made the rounds.

Yet many foreign investors still wish to enter the Chinese market through equity joint ventures, and the particular risks involved with this type of arrangement require careful planning. One way to reduce your risk is by conducting due diligence on your potential Chinese joint venture partner before you tie the knot.

Another way is by making sure that you will control the joint venture. Since most foreign investors wish to maintain control over their Chinese joint venture entity, this issue is usually paramount.

Yet our China lawyers have far too often seen foreign investors make a mistake that effectively leaves them without control—a mistake so fundamental that it accounts for most of the failed equity joint ventures in China. The mistake is assuming that Chinese joint ventures are managed according to a Western model, under which the board of directors has controlling power over the company.

Most foreign investors strive to obtain a 51% ownership interest in the equity joint venture, assuming this gives them the right to elect the entire board and thereby control the company. After winning the struggle for percentage ownership of the joint venture, foreign investors will frequently allow the Chinese side to appoint the equity joint venture’s two key management positions, the Legal Representative and the General Manager. But these “concessions” are all part of the Chinese side’s plan, and effectively render board control meaningless.

Control over a Chinese joint venture actually comes from the following:

  • The power to appoint and remove the China joint venture’s Legal Representative.
  • The power to appoint and remove the General Manager of the China joint venture company. The joint venture agreement must make clear that the General Manager is an employee of the joint venture company employed entirely at the discretion of the Legal Representative (whom you have the power to appoint and remove). Note that this agreement will be enforced under Chinese law and its official version should therefore be in Chinese.
  • Control over the company seal, or “chop.” The joint venture partner that controls the joint venture’s registered company seal has the power to make binding contracts on behalf of the joint venture company and to deal with the joint venture company’s banks and other key service providers. The annals of history are filled with foreign companies getting shut out of their China joint ventures after losing control of the seal.

The Chinese side to a joint venture will typically refuse to give the foreign party the above three measures of control.  It will argue that it should control the joint venture for reasons of both efficiency and expertise. In many cases, it also will claim that it cannot bring its political connections, or guanxi, into play unless its own people fill the Legal Representative and General Manager slots. This argument is usually just a smoke screen for the Chinese side trying to secure the true levers of joint venture control. For more on the difficulties of China joint ventures, check out How We Really Feel About China Joint Ventures. We Love Them AND We Hate Them.

Using a Chinese lawyer or a “China consultancy” increases your risks. Chinese lawyers are not bound by the same duties of loyalty as American lawyers and it is not unheard of for them to work on behalf of your Chinese counterpart to get the joint venture deal done. This may be because the Chinese lawyer is getting paid by the Chinese company or it may simply be because the Chinese lawyer knows he or she will make more money if the joint venture deal concludes. We are aware of consultancies that have represented American and European companies on joint ventures while getting a percentage of the deal from the Chinese side if it goes through.

If you want control over your China joint venture, you should follow the rules set forth above. Otherwise you might find yourself in a venture with no legal right to guide it.

You have been warned.