One of the favorite topics among China lawyers is the big mistakes they have seen their clients, rejected clients, and others make when trying to navigate China. The discussion usually transpires with one attorney telling the facts, with the others then giving a knowing laugh and nod and then trying to top it. Had this discussion the other day and here are my favorites from it (some are mine, some come from others:
1. Sophisticated U.S. company calls lawyer about setting up their publishing business in China as a WFOE. Brags about the market for their publication in China, basing that on a USD$500,000 study they just completed. U.S. lawyers asks whether they did any research on whether such a business can be conducted legally in China as a Wholly Foreign Owned Entity. Super long pause.
2. Sophisticated U.S. company builds factory in China and right before they are ready to take it online, they learn that they cannot import the key chemical they need for it without Chinese government approval regarding its safety. Six months later they get the approval and the factory opens.
3. U.S. company insists against attorney advice that it can go into a China Joint Venture without contributing anything other than just its technology. In other words, it fails to abide by the requirement that it contribute a certain amount of monetary capital. Just as its lawyer predicted, it ends up leaving China within a year while its technology stays.
4. U.S. company insists against attorney advice there will be no problems in forming its WFOE in China illegally because the local government supports them 100%. Within a couple of years Beijing comes in and shuts them down.
5. Foreign companies (we talk about this sort of thing as a common occurrence) hires inadequate company formation firm to form its China WFOE and buys into the notion that the lower the minimum capital requirement, the better. After the China WFOE is formed and has run low on money, the home office in the United States or wherever sends an infusion of money to the China WFOE. China then taxes that money as income to the WFOE.
6. U.S. company pays bribes and then gets investigated for Foreign Corrupt Practices Act violations.
7. U.S. company fails to register its trademark in China because it was “just” manufacturing there. Ends up getting its product blocked from leaving China by a Chinese company that registered the trademark the U.S. company was using but had not registered in China.
8. U.S. company buys expensive property in big-time China city and then spends millions refurbishing it for high-end offices. Then hires lawyer to handle the legalities of raising additional funds in the United States to complete the refurbishment. Lawyer spends a few hours doing his own due diligence on the project and quickly discovers the building is zoned for hospital only.
What are your stories from the front lines?