Whenever one of our China lawyers drafts an agreement for a client doing business in China, one of the first things we ask is the identity of the Chinese counterparty. It’s a deceptively simple question.

The typical Chinese manufacturer (for example) is composed of multiple entities, with complicated lines of ownership. One entity may run the factory, another entity may run the office, and a third entity may serve as a holding company – and is probably based in Hong Kong or Taiwan. Overseeing the entire operation is a controlling shareholder who could care less which entity is the contracting party. And every single person on the Chinese side ignores corporate formalities and behaves as if all the entities are interchangeable.

But the entities are not interchangeable, and the counterparty matters. How it matters depends on your goals and the Chinese side’s corporate structure.

One basic rule is that the counterparty should have financial resources. No rational company should sign an agreement with a counterparty that is effectively judgment-proof. But many holding companies, especially those in Taiwan and Hong Kong, conduct no business other than receiving payments, and their bank accounts are emptied every few days.

Another rule is that the counterparty should be the entity that you pay. In the face of a stack of wire transfer receipts and a signed contract, it’s hard to argue that a business relationship doesn’t exist. This rule is considerably less compelling, however, when the Chinese side insists that payments be made to its holding company.

Meanwhile, if you have any hope of stopping IP infringement, the counterparty should be the entity most likely to steal your IP – the factory. But the factory may be an otherwise impractical choice if it has neither financial resources nor English-speaking personnel.

Similarly, you will need to consider dispute resolution, especially if the holding company is a Hong Kong or Taiwan entity. Where do you want to litigate (or arbitrate)? And where do you need to enforce the judgment?

Regardless of the named counterparty, any contract should reflect the reality of your relationship with the Chinese side. If the factory handles manufacturing and shipping, the office handles communication and orders, and the holding company handles all payments, then the contract should make that clear. The ideal situation, of course, would be for one Chinese entity to handle everything. But reality rarely matches the ideal.

Determining what makes sense in your particular situation will require a combination of common sense and due diligence. And, increasingly, common sense when conducting due diligence.

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Photo of Matthew Dresden Matthew Dresden

Matthew advises a wide range of businesses on corporate and transactional matters at Harris Bricken, with an emphasis on media and entertainment, international intellectual property, and cross-border work. Matthew provides finance, development, production, and distribution legal services for filmmakers and other creative artists…

Matthew advises a wide range of businesses on corporate and transactional matters at Harris Bricken, with an emphasis on media and entertainment, international intellectual property, and cross-border work. Matthew provides finance, development, production, and distribution legal services for filmmakers and other creative artists, and has worked on behalf of film studios, cable channels, production companies, video game developers, magazines, restaurants, wineries, international design firms, product manufacturers, outsourcing companies, and computer hardware and software companies. Matthew is widely viewed as an expert in Chinese intellectual property law, and is regularly quoted in publications from the New York Times to The Economist to Variety.

Before attending law school, Matthew worked in Hollywood for eight years as an independent filmmaker, starting as a production executive for Roger Corman’s Concorde-New Horizons Pictures. Before that, he was a computer science graduate student at Stanford University. He has also worked as a journalist, a transportation planner, a food critic, and a website designer. He serves on the board of the Northwest Film Forum, and is currently the immediate past chair of the Washington State Bar Association’s International Practice Section. He is also an adjunct faculty member at Indiana University Maurer School of Law, where he teaches a clinic on legal issues for independent filmmakers.

Matthew was born and raised in the San Francisco Bay Area. He spends his free time watching movies, hiking, cooking spicy food, and relaxing with his wife and daughter.