I spoke at a seminar last week in Chicago on what companies that source their products from China need to be doing to avoid litigation. Number one on my list was to “choose a good Chinese partner.”  I went on to say that the odds of having problems with a legitimate Chinese company are a lot lower when you deal with a “legitimate” Chinese company. I then talked of how legitimate Chinese companies do not like getting sued and will usually work to avoid that.

Needless to say, an attorney button-holed me to ask the next logical question: “how do you distinguish between a Chinese company that is legitimate and one that is not?”

My answer was along the following lines:

  • The first thing you do is ask the Chinese company to send you a copy of its business license. Do not be afraid to do this. Chinese companies do this all the time. If the Chinese company refuses to send this to you, walk away.
  • You then need to have someone fluent in Chinese and with knowledge about Chinese business licenses examine the one that you have been sent. Our China attorneys typically look at these for the following:
    • To determine whether it is real or fake. We do this by comparing the information on the business license provided to us with the corresponding information on the relevant Chinese government website — typically the local SAIC — State Administration for Industry and Commerce). If the business license you have been provided is fake, you walk away.
    • To see when the company was formed. We like to compare what the real business license says against both what we were told (by email or whatever) and also what the Chinese company says on both its English language and its Chinese language website. If there are different years given in different places, we get suspicious and we ask more questions.
    • To see where the company is located. We like to compare this too against both what we were told (by email or whatever) and also what the Chinese company says on both its English language and its Chinese language website. If there are different addresses given in different places, we get suspicious and we ask more questions.
    • To see what the scope of the Chinese business is, as listed on its registration. If the scope is “consulting” and our client thinks it will be ordering ten million dollars worth of widgets from a factory, we get really suspicious. Looking at the scope is a good (though not always fool-proof) way to determine whether you are dealing with a manufacturer or a broker.
    • To see the amount of registered capital. If the amount is too low, the odds are good that it is not a manufacturer. If the amount is really high, the odds are good that this is a big company.

Doing the above is not nearly enough due diligenc for big deals, but it is a fast, relatively cheap way to get a much better sense about a Chinese company. Just the above is not going to be enough to guarantee a good long-term relationship, but it oftentimes is enough to let you know that you do not even want to attempt a short-term one.

For more on China due diligence, check out the following:

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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.