About a month ago, I wrote a post, entitled, “Variable Interest Entities (VIE) In China. What Would The Buddha (Steel) Say?” That post focused on Variable Interest Entitles which are workaround entities set up to allow foreign companies to do in China (through a Chinese domestic company) that which they are technically not supposed to be doing.  

I am writing about VIE structures now because, according to this Pillsbury “Client Alert,” Buddha Steel, a Chinese company publicly traded in the United States, revealed last week “that the PRC government had disallowed its variable interest entity (VIE) structure.” The Pillsbury Alert states that “it is not clear whether this [Chinese government action] is a highly sector-focused event, part of a broader move by the PRC government against VIE structures—or, as we think most likely, a ‘one-off’ event driven by local facts and circumstances:”

A few days later, I received the following email from a loyal reader:  

Can I ask you a quick follow-up question regarding the Buddha Steel stories?

You have more experience than me dealing with local/national government issues in China than me. In my mind the real danger with this situation is that it opens things up for local governments to stop these constructions regardless of whether the central government does so or not. 

Do you think it’s likely we’ll see something like this?

I agree that the central government is unlikely to take action against Baidu, Sina etc. but I find it quite plausible that they’ll let local governments implement these types of objections as they please.

I promised a follow up post and here it is.

I used to write quite often of the differences in legal enforcement between China’s local governments and Beijing. Most of the time, these posts would conclude wtih our advising foreign businesses in China to get on good terms with their local governments, but to always still realize that being on good terms with their local governments will not insulate them from facing legal problems if they violate China’s national laws.  

The above advice still holds true, but in the last few years we have noticed increasing enforcement of business laws by local governments and, more importantly, we have seen local governments increasingly enacting their own business laws. We also have confronted local government interpretation of national laws that vary so much from the norm as to render the same laws very different depending on location. We wrote of this in the post, “China ‘Laws’ Are Local And Don’t You Forget It.” We also touched a bit on the localization in our post, “China Government Contracts. Good Luck With That.” In many cases, what are called laws or are viewed as laws are really little more than local customs. These “customs” can have real impacts on business.

It just seems that many local Chinese governments are getting more assertive and independent in their handling of business laws. It also seems that so long as those local governments do not go directly against the laws coming from Beijing, Beijing seems not to care; Beijing seems fine with local governments enacting/enforcing laws that go beyond Beijing’s. However, Beijing does still care about local governments contradicting or failing to enforce Beijing’s laws and you still can get in trouble for violating China’s laws, no matter who locally is insisting there will be “no problems.”

All of this is combining to make staying within the law in China all that much more difficult.  

Are you seeing the same thing out there?

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Dan Harris

I am a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

I mostly represent companies doing business in emerging market countries. It has taken me many years to build my network and it takes constant communication and travel to maintain it. My work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

I was named as one of only three Washington State Amazing Lawyers in International Law, I am AV rated by Martindale-Hubbell Law Directory (its highest rating), I am rated 10.0 by AVVO.com (its highest rating), and I am a SuperLawyer.

I am a frequent writer and public speaker on doing business in Asia and I constantly travel between the United States and Asia. I most commonly speak on China law issues and I am the lead writer of the award winning China Law Blog (www.chinalawblog.com). Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed me regarding various aspects of my international law practice.

I am licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at my firm, I focus on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.