international lawyersOur international lawyers draft more NNN Agreements than any other agreement. These agreements are used to protect your confidential information. They protect confidentiality and they protect against the company or person to whom you reveal the information from using that information to compete against you or go around you to your own customers or clients. The three Ns are for Non-Compete, Non-Circumvent, and Non-Disclosure. These contracts are commonly used before revealing anything important to anyone, such as your technology, designs, or customer lists, whether those qualify for trade secret protection or not.

Because our international attorneys so often draft NNN Agreements, we have a template email we send to our clients (modified each time to suit the particular situation) explaining the customized NNN Agreement we have just drafted for them and explaining what they should do with that agreement going forward. The below is such an email and I write about it because it not only explains in a real life way how NNN Agreements should be employed, it also explains what makes NNN Agreements different from a traditional NDA Agreement and why NNN Agreements are so important.

Attached please find an English/Chinese draft NNN Agreement for use with [XYZ company]. My comments follow:

  1. This is not a traditional US-style NDA agreement. A traditional NDA agreement relies on the concept of trade secrecy. Under this sort of an agreement only something that qualifies now and later as a trade secret is entitled to protection. As a practical matter, the information you will be disclosing will almost never meet the technical legal standard for trade secrecy. Therefore this NNN takes a different and more effective approach. We write this to prevent your counter-party from using the information you give them in competition with you.
  2. The agreement has no set term. In other words, [XYZ Company] can NEVER use your confidential information; it is a permanent obligation.
  3. The agreement holds the receiving party [XYZ Company] liable for any damages caused by a related party in violation of the agreement as if the act were committed by the receiving party.
  4. The agreement provides for contract damages in a specific monetary amount for every act of breach. This provision provides two primary benefits. First, it makes clear to [XYZ Company] that it will face real and quantifiable consequences each time it breaches the NNN agreement. Second, a specific monetary amount provides for a specific minimum level of damages which then provides a court with the basis for a pre-judgment seizure of assets. A credible threat of your seizing [XYZ Company] assets greatly increases the likelihood of [XYZ Company] abiding by your NNN agreement. Note that this amount needs to be a reasonable pre-estimate of your damages as a result of XYZ Company’s violation of the NNN. The amount we have set for contract damages in your contract is fairly standard for this sort of transaction in _________ [country].
  5. Note that this agreement gives you the right to enter into an NNN with a subcontractor. Note also though that regardless of whether you  enter into such a separate agreement, the receiving party will be liable for any damages caused by a subcontractor in violation of this agreement on the same basis as if the act were committed by the receiving party.
  6. I was able to confirm [XYZ Company’s] name and address information against the relevant government website. According to available government data, ________’s title at the company is manager and executive director and I have inserted this information into the agreement.
  7. If XYZ Company accepts the terms of the agreement, you should go first by signing and dating this agreement and then sending it to [XYZ Company]. You should wait until you get this agreement back, fully executed, before you disclose any confidential information. 

Please review and get back to me with any questions.

International Education Law

A couple years ago we wrote a four part series on establishing an international school in China. In part 1, Establishing International Schools in China: The Basics, we discussed the complications foreign parties typically see when trying to start a school in China. In part 2, Establishing International Schools in China: A Deeper Dive, we focused on what it takes to start a School for the Children of Foreign Workers. In part 3, Establishing International Schools in China: A Deeper Dive (Continued), we discussed Sino-Foreign Cooperative Schools and Chinese Private Schools. In this, my last post in this series, I look at future trends for international schools in China. In Part 4, Establishing International Schools in China – Future Trends, we wrote about some of the distinctive issues foreign schools face in China. We also sometimes write about the legal issues stemming from teaching overseas. See e.g., Teaching English In China: Be Careful.

Many of our lawyers and staff attended international schools or are sons or daughters of teachers or professors. I spent my junior year of high school at Robert College in Istanbul, a year studying Spanish at LAE Madrid, and 8 months studying French at the Institut de Touraine. All three are amazing schools and these were some of the best years of my life. My father taught English Literature at a liberal arts college for 36 years. Our law firm has a long history of representing universities and international schools on their international legal work, ranging from helping them set up in foreign countries to licensing technology they’ve developed to foreign companies.

Our writings and our legal work and our various international school connections mean we get 10-20 emails every month from people teaching around the world. These emails can roughly be divided into the following four categories:

  1. Visa issues.
  2. Employment contract issues.
  3. Medical and landlord issues.
  4. Starting a school issues.

Recognizing that most of these teachers are not wealthy, our lawyers strive to do their best to give responses that contain actionable advice with the limited time and information we have. The below reflects how we typically handle the four most common categories of foreign teacher emails.

1. Visa Issues. We almost always have to punt on visa issues because our immigration law expertise is mostly limited to business immigration to the United States, with a smattering of additional knowledge gleaned from the transactional work we do in Asia and in Europe. Since none of us have deep immigration law knowledge relevant for foreign teachers our response is usually to urge them to seek out a local immigration lawyer for assistance. I know from my own experience in other countries that there is a veritable ton of bad and outdated immigration law information on the internet and an hour or two with a lawyer who actually knows this area of law can be invaluable. This pretty much true of all aspects of international law. See China Law Online: It’s All Wrong.

2. Employment contract issues . The typical email we get will say something like “I am a teacher in China and I have been fired for taking a day off because my sister came to visit. Can my school do this?” Our response to this sort of email will usually be something like the following — changed quite a bit for brevity and for emphasis:

I have no idea whether your school can or cannot and for us to know we would first need to make sure we do not represent the school at which you worked (because if we did, we could not represent you) and then we would need to read your contract and then compare that as against the local laws and the province’s laws and China’s laws and then maybe speak with the local employment authorities as well. If it does turn out that the school illegally terminated you we would then need to figure out exactly what we can do about that. Likely that would be registering a complaint with the appropriate Chinese governmental body and using that to try to pressure your employer to take you back, which is very unlikely to happen. When you are not taken back we would then need to look into suing the school. If we did sue the school and you won, we might get an order saying the school needs to take you back and we might get some really small amount in damages. Then again we might also lose. Your school may or may not abide by the order.

The problem with the above is that at some point your China visa may be revoked and you will need to leave China. And win or lose, you challenging this school may lead to you never getting a job in China again and going through the above will be time consuming and expensive.

3. Medical and landlord issues. These emails often come down to money. “The hospital wants $400” or my “landlord wants to raise rent by $100 a month.” As a father, my responses to these are usually nine parts paternalistic, one part legal.

4. Starting a school issues. The typical email will come from someone who has been teaching English in China or in Vietnam or in Poland or wherever and they now want to know what it will take for them to start a school in one of these countries. The below interaction is an amalgamation and it is typical:

English Teacher: We would like to open a school for foreign students _________. There is a small but growing group of foreign parents in the city looking for foreign education options for their children.

We are unlikely to get the enrollment needed to have our own campus. Can we legally share school grounds with a local primary school (public/private) if our students do not follow the Chinese curriculum? If we can’t, then I guess we are out of luck.

My second question concerns whether your law firm could handle the process, assuming it is feasible and how much it would cost.

Our response: We have helped set up many foreign school companies in China but we’ve never dealt with your question on sharing space in [China fourth tier city]. My guess is that you can share facilities with the local school, but only if your school has its own separate address. I say this because most cities require you have your own address for any WFOE (the company we would need to set up to own and operate youor school), but things like this tend to be very local.

As for how much this will cost, I would estimate it will cost at least $30,000. This estimate would be for our China lawyers and China business specialists (all of whom have substantial experience in setting up foreign schools throughout China) to research and figure out what you can and cannot do, form the company, secure various governmental approvals, register your trade names and logos, help on the lease and other agreements with the entity that owns the existing facility, draft your employee contracts and your employer rules and regulations, and the various other legal matters that invariably arise when starting a school company in China, including all sorts of discussions with local government officials.

If – as it sounds – the ability to use the facility will make or break this deal, I would propose we start by figuring out whether that is or is not possible. We would do that by researching the applicable laws and then by confirming with the local authorities that our reading of the laws corresponds with theirs. If you can tell us more about the potential space we can get back to you with an estimate for our handling this discrete issue.

If you have any additional questions, please don’t hesitate.

Pretty much every time we then get something back from the teacher saying that the costs and/or the complications are more than they expected and they will need to re-think.

As much as I dislike being the one to hit them with reality, I take comfort from believing it is better they get the truth than to have them waste time and money on a project they are will not finish.

 

China foreign investment lawyers

MEH.

For weeks now, our China foreign investment lawyers have been getting a steady stream of emails regarding China’s now approved new law on foreign investments. Those emails can very roughly be divided into two camps:

  1. Those (mostly from our own clients) asking us what it will mean.
  2. Those (mostly from China Law Blog readers) using this law as proof that we either “exaggerate how unfair China treats foreign companies” or that we “have become way too cynical about China.”

This post strives to answer both email strains.

The new law sounds good but the devil will be in the details and like everything else related to China laws the details will be in its enforcement. But right off the bat, you can color me highly skeptical.

China has never treated foreign companies remotely the same way it treats domestic companies. China’s entire economic system is based on this and, if anything, things have mostly gotten worse for foreign companies in the last 5-10 years. Why should things all of a sudden change now? Because China is under tremendous pressure from both the United States and its own declining economy to stimulate foreign investment.

But China — like pretty much every country in the world — does not like being told what to do by a foreign power or even by a declining economy. This, coupled with China’s long history of failed promises to open up more to foreign businesses, makes me doubt it is really serious this time either. And reading between the lines of how this law got approved and even when it will actually become law make me doubt China’s enthusiasm even more.

In China approves new foreign investment law designed to level domestic playing field for overseas investors, The South China Morning Post highlights the following red flags:

  • “Beijing rushed the legislation through the country’s largely ceremonial legislature in an effort to fend off complaints from the United States and Europe about unfair trade practices. The new law was first introduced as a draft in 2015, but its progress picked up markedly from the middle of last year to address issues identified by Washington as part of the US-China trade war.”
  • “At the same time, the wording of the law, which will replace three foreign capital laws – the Law on Sino-Foreign Equity Joint Ventures, the Law on Sino-Foreign Contractual Joint Ventures and the Law on Foreign-Capital Enterprises – passed between 1979 and 1990 in the early years of China’s process of reform and opening up, is quite general, leaving many details to be addressed in other regulations and implementation procedures.”

In other words, this is an effort China started in 2015, but now it all of a sudden (under the pressures mentioned) above, has decided to embrace. Enthusiasm matters because without enthusiasm there will be no enforcement. Heck, this law is not even set to go into force until 2020 and it needs all sorts of supporting rules and regulations in the meantime. Enthusiasm matters because without the enactment of the supporting rules and regulations there will be little to nothing to enforce.

The SCMP article ends with an amazing quote from “He Weifang, an outspoken law professor at Peking University” who questions whether China’s existing government structure will adequately enforce the new law:

“We need democratic supervision and justice to ensure enforcement if there are any regulations issued later. Enforcement really relies on structural changes and an independent judicial system. So, I cannot say that I will be more optimistic when more regulations come out,” he said.

“It would be even worse if we lack the implementation mechanism after we enact a law, because the outside world will not trust you no matter what law you enact in the future. We need checks and balances to ensure enforcement, otherwise, all well-intentioned enactment of laws will end in vain.”

He is, of course, 100% right.

Addressing the cynicism question, all I can do is quote what an audience member once said at a China event I attended: “For those of us who have been dealing with China for more than a decade and have therefore been involuntarily trained to ignore the smoke and just wait for the fire, can you please just tell me what you have seen that has actually changed with ….” This proposed law is smoke that may or may not ever become fire and even if it does become fire, it may be nothing more than a match that soon blows out.

Is this new law an effort to improve the chances of a China trade deal? How strong will this law be if there is no trade deal? How strong will it be if there is a trade deal?

At this point, the best strategy is probably just to wait and see.

China bribery. Don't. Just Don't.

I’ve become obsessed with the college cheating scandal that has so far implicated Hollywood celebrities, a high-end lawyer from a Wall Street Law Firm, a “slew of CEOs,”  among others.

I am sorely tempted to use this scandal as a teaching moment on how we Americans need to look more deeply at the rising inequality and unfairness in our country, instead of falling back on comfortable tropes like how we are the land of opportunity. But I recognize this is probably not the place for that.

So I will instead use it as a teaching moment on why bribery is dangerous and even pointless.

Back in 2017, we did a post, China Bribery. Not Smart and Not Necessary. In that post I started out talking about how it is wrong to contend that contracts are not needed in China because of court corruption. I then talked of how most Americans don’t understand how court corruption usually works in breach of contract cases, using a Russian litigation matter my firm had handled as an example. The point of that post and this one was that paying bribes is never wise:

Note also that we never discussed our client paying a bribe to anyone. That is always the worst alternative because it puts people at real risk of going to jail without anything close to a guarantee it will even work. When our Russian lawyer said that people in Russia rarely get arrested for bribery, he was talking about Russians, not foreigners. Do you really think you have the savvy to engage in risk-free bribery in a foreign country? I can tell you that none of our firm’s China lawyers would ever make that claim.

I then wrote about how after a talk I gave in Cleveland that touched on bribery and corruption I discussed China bribery with “an audience member, Kimberly Kirkendall, who had commented to the audience that in her experience many of the times where she was aware of someone having paid a bribe in China they had done so essentially because they wanted to, not because it was necessary they do so.” I mentioned to Ms. Kirkendall “how some companies seem almost to delight in paying bribes but that our China lawyers — believe it or not — had never once been asked to pay a single bribe in China, even though we are constantly dealing with the Chinese government to register trademarks and copyrights and WFOEs and Joint Ventures. Kimberly commented on how foreigners sometimes brag about paying bribes and how troubled she was by that. I then mentioned how stupid and risky it is to pay bribes in China.”

In that post I quoted extensively from something Ms. Kirkendall had written on bribery that I very much liked:

In China 30 years ago it was very common to incentivize someone to do their job by giving them a gift. Why? The China of the late 1980’s and into the 90’s was a communist economy that relied on 95% government controlled business. And in that communist economy there was very little difference between the salary for the GM of a factory and the guy who mopped the floor. So how were they compensated for their relative value to the organization? The GM could “gift” some of the company’s products to someone else, who often then re-gifted that to someone they wanted to influence and so on and so forth. By gifting them, the GM was able to get a slightly larger apartment, or their child in a better school, or some other economic benefit. People recognized their relative power in the economy by giving and/or accepting gifts. Sometimes cash, but frankly there wasn’t a lot of cash to go around. Much of this was actually bartering, trading your goods/access/influence for someone else’s.

In the booming late 1990’s and into the early 2000’s, as people were allowed to own a business in China, things changed a bit. How do you move a government owned or controlled economy to a privately held one? Where do individuals get the money to buy apartments or companies if they weren’t making much cash beforehand? In this period of transition there were many instances of people using their power and influence for economic gain. From how these government companies were taken private (and ownership and shares divided up) to how people came up with the money to buy apartments or build new ones. In this environment people in high positions saw the money being made and they wanted their share – and now there was the cash to pay them.

Towards the late 2000’s and into today, we are looking at a China where many people (but not all) are in a position to make money in direct ways. Through entrepreneurship, increased education and wages, investment, taking risks on new ventures, or changing jobs to accelerate their careers. Much of the population are no longer stuck in a powerless place where bribes are their only way to obtain value from their position of authority. Certainly it still exists, and there are still people who feel that they can’t get ahead so they exact a little extra money on the side.

When I hear that a US company has used bribes I start wondering about the reason for the bribe. Was it a payment to someone to do his or her job or a payment for them not to do their job? In almost every instance these days, it seems it is the foreigner who initiates the bribe. The below examples of matters on which I personally worked highlight the important difference between these two reasons.

Example: A U.S. company was importing components from China, using both its own team in China to find suppliers and control the orders and a trading company. The US management came to our China team for help in figuring out why some in their company were claiming that they needed to use a trading company for some of their China business, even though the trading companies were increasing costs by taking their own payments from the transactions. They wanted to know why they were paying a trading company to buy and export goods when they could do all of that themselves. It turned out that a group within the company wanted to utilize lower HTS custom codes for export to save money and Chinese Customs didn’t agree with that custom code classification. The US company was using the trading company to pay China customs a bribe so they could export their products under the “wrong” code and save money. In other words, there was no need to pay bribes, just a desire.

Example: A company was setting up a factory in China and the local government was concerned about air emissions from its manufacturing process. In the U.S. the company had shown that emissions were well within range of EPA guidelines. The local Chinese agency was not convinced and asked for more tests and documentation. The company was left with options – see if there was an “economic incentive” that would encourage the regulatory official to approve the paperwork, or spend a few months and thousands of dollars doing the research to prove their manufacturing met the guidelines. They chose the “economic incentive” route. Again though, an example of a company choosing to pay a bribe out of a desire to get a government official not to do his or her job, not a bribe necessary to get that official to actually do his or her job.

The point I am trying to make here is that the excuse foreigners make about having no choice but to pay a bribe rarely if ever holds true. The foreign companies I hear about paying bribes had plenty of choice; they simply chose wrong. They were not responding to a request for money but offering money as an incentive for a Chinese worker to deviate from his or her professional responsibility.

I agree.

I cannot resist shamelessly plugging my alma mater, Grinnell College, from where my wife also graduated and from where my youngest daughter will in two months be graduating. I am plugging Grinnell College because it is one of a small number of U.S. colleges and universities that truly has a “need blind” admissions policy and will meet the financial needs of all its American students. Wikipedia defines need-blind admissions as a “policy in which the admitting institution does not consider an applicant’s financial situation when deciding admission. Generally, an increase in students admitted under a need-blind policy and needing financial aid requires the institution to back the policy with an ample endowment or source of funding.” In other words, schools that are not pay to play.

If you are not only troubled by parents paying bribes to get their kids into a school, but also troubled by the daughters and sons of the wealthy being more likely to get admitted or being able to fund their education, you should consider one of the following schools that are both need-blind and meet the full demonstrated financial needs of their students (per Wikipedia):

Your thoughts?

China lawyersPotential clients often ask our China lawyers, “what’s the worst thing that can happen if I don’t do ________.” My usual response is I don’t know or you get sued or you get arrested or you will never be allowed to leave China.” See Doing Business in China with Deportation or Worse Hanging Over Your Head. Whenever I mention prison or getting stuck in China forever I can “hear” the eyes roll on the other end of the computer or the phone because few take this risk seriously.

Guess what people. Get over your First World rule of law biases and start dealing with the real world, or as a friend of mine who regularly deals with China hostage situations is always saying, “this is China.”

The “this” about China hit me hard today via our China Law Blog Facebook page (go here to check that out where, purely coincidentally, my most recent post is how the portion of my Chinese TV interview from yesterday where I discussed hostages in China was completely deleted). Anyway, here is today’s story and it is filled with absolutely critical lessons for anyone doing business in China AND for anyone doing business with China who has any intention of ever going to China.

So I wake up this morning with a Facebook message from someone in trouble in China asking us to publicize his situation on our blog to help in a fundraising campaign. The fundraising campaign is here and it is titled, Being wrongfully sued and not allowed to leave China and rather than have me tell the story, I will pull it word for word from this campaign (see below) and then “unpack” it. Just as an aside, I visited the Getty museum in Los Angeles about a week ago and our tour guide used that word (unpack) before analyzing each and every painting and sculpture. The first time she used it I loved it but by the tenth or so time I hated it. This being your first time….

In 2013/2014, we started a personal training fitness gym in Shenzhen, China with 3 foreign partners. The initial agreement and plan between the partners was to grow the gym, however 2 years into operation, due to a variety of factors beyond our control, we could no longer afford to operate the business at the standard that we wanted. We had to pay high costs and find a way to close the business while respecting the staff and community.

The attempted transfer and closing process took many months while we interviewed potential investors and people who wanted to take it over. It ultimately came down to a young Chinese man who had spent many months in the gym, wanted to own his own gym and was getting to know the operations and the members. Unfortunately for us, this man’s intentions were not honest, and he manipulated the situation to his favour. Since we are foreigners in China, we were not knowledgable about certain legal processes and trusted him in this transfer. He devised a way to take over the business by paying the business’s then upcoming bills due, and some debts owed – amounting to RMB 217,000 (approx US$ 32,000). He then wrote up a pre-agreed contract stating that the RMB217k was a loan and that the business and equipment would serve as collateral should the loan not be paid back. Since we wanted to simply move on from the business, and were not able to handle the expensive monthly overhead, we agreed to this process, meaning we received nothing in the end for a business we had spent 3 years building, but would be free of the business liability.

This Chinese man is a loan shark, and once we had parted ways with him, believing everything was agreed to and wrapped up, we moved on with our lives.

Fast-forward two years, and unbeknownst to us, this man had filed a lawsuit, claiming that the business owed him the RMB 217k. The case was filed, and was ruled in his favor, since we had no knowledge of the case and thus never showed up to court to contest this man’s false version of events. It wasn’t until John tried to leave the country that we came to find out about its conclusion as he was told that he would not be allowed to leave China. In China the legal system greatly favours Chinese, and the entire case was processed and closed without our knowledge and thus no response from us, and as it stands now we are being ordered to pay a whopping RMB 250k ($40K).

We want to chance to set the record straight and show the court the documentation which shows the agreement we had and how this man has committed fraud. We want to re-open the case, and respond to the verdict that was passed without our knowledge. In order to fight the case we need to hire a lawyer and pay court costs and so are asking our family, friends and any citizens of the world who can support our cause and pursuit for the truth.

Initially we are trying to raise RMB 55K ($8K) to cover the legal and court fees, so we can do everything possible to clear our good name and release the government hold on John’s passport. This will be a long, difficult battle but we will keep you updated every step of the way and maintain full transparency throughout this process.

Thank you so much for taking the time to read this, and for your support, whether financial or just by sending positive energy and thoughts our way.

Now for the legal unpacking (that’s only by second time with that word) and an analysis of what likely went wrong and what probably should be done to try to solve it. The quotes from above are in normal font and our analysis is in italics.

  1. “He then wrote up a pre-agreed contract stating that the RMB217k was a loan and that the business and equipment would serve as collateral should the loan not be paid back. Since we wanted to simply move on from the business, and were not able to handle the expensive monthly overhead, we agreed to this process, meaning we received nothing in the end for a business we had spent 3 years building, but would be free of the business liability.”  Mistakes: Not using a lawyer with this contract. Based on the above, it very much appears that this was a loan contract for RMB217k and this person(s) did not fully realize that. Any competent lawyer could have told them that. I am guessing the contract was in Chinese — why wouldn’t it be as it was a Chinese transaction —  and that may also explain why it was not fully understood. Or maybe it was a situation where eagerness took precedence over common sense. Who knows? Bottom line is that you should never sign a contract without fully understanding it and you should virtually never sign a contract without the assistance of a qualified lawyer.
  2. Fast-forward two years, and unbeknownst to us, this man had filed a lawsuit, claiming that the business owed him the RMB 217k. The case was filed, and was ruled in his favor, since we had no knowledge of the case and thus never showed up to court to contest this man’s false version of events. Mistakes: Maybe none, or maybe this person received notice of the lawsuit but did not realize what it was. I say this because Chinese courts tend to be very good at getting their notices out and they also tend not to rule until it has been confirmed that notice was received.
  3. It wasn’t until John tried to leave the country that we came to find out about its conclusion as he was told that he would not be allowed to leave China. Mistakes: Chinese law allows the government to not allow people to leave who owe money. This is why our China lawyers are constantly telling people not to go to China if they MIGHT owe money and to get the hell out of China as quickly as possible if they are there. See Maybe Owe Money To China? Don’t Go There. 
  4. In China the legal system greatly favours Chinese, and the entire case was processed and closed without our knowledge and thus no response from us, and as it stands now we are being ordered to pay a whopping RMB 250k ($40K). Mistakes: I’m guessing a Chinese defendant would have had the same result as it sounds like a fairly garden variety loan agreement and this amount probably included interest and perhaps attorneys’ fees as well.
  5. We want to chance to set the record straight and show the court the documentation which shows the agreement we had and how this man has committed fraud. We want to re-open the case, and respond to the verdict that was passed without our knowledge. In order to fight the case we need to hire a lawyer and pay court costs and so are asking our family, friends and any citizens of the world who can support our cause and pursuit for the truth. Mistakes: Is it even possible to re-open the case at this point? I do not know but I doubt that it is. I could be wrong about this, but it seems to me that this person is doubling down on his mistakes by again not hiring a lawyer to figure out the best way to get out of this. Let’s just suppose it is not to late to try to “re-open” the case. In most countries of which I am aware, to be able to re-open a case like this you must not only show that you were not given notice of the case you also must show that if the case were to be re-opened that you have at least some chance of overturning the ruling on the merits. If this is a legal and valid and garden variety loan agreement, that chance may very well not be there. If re-opening the case is going to be impossible, no money should be spent on that route. It probably should instead be spent on trying to strike a deal with the lender and in return for whatever payment he accepts, a settlement agreement is signed (this settlement agreement should be in Chinese and pursuant to Chinese law) and then used to get the hold on leaving China lifted. 

But in the end, this person does need money to hire a Chinese lawyer (probably ideally based in whatever city in which the lawsuit was brought) to figure out how to figure out the situation and help this person get out of China.

 

China joint venture lawyers

This is part 4 of our series on China Joint Ventures. We are writing this series now because our China lawyers are seeing a record number of potential joint ventures, due largely to China’s declining economy, the belief that truly foreign companies will not be well-treated in China, and a desire to try to “share the risk” of all this uncertainty. In part one of this series, China Joint Ventures: The Long Version, we talked about fake and exploitive joint ventures. In part 2, we assumed your Chinese counterpart is legitimate and wants to do a legitimate JV with your company and we discussed how to make sure you are truly on the same page with your China joint venture counterpart(s)  regarding what will go into the joint venture and how it will operate once formed. In part 3 we discussed some of the things you need in your joint venture agreement if you are to reap benefits from your China joint venture. In this part 4, we discuss why the China corporate attorneys at our firm both love and hate China joint ventures.

For better or worse, our law firm has developed quite a reputation for not liking joint ventures and so it is not uncommon for us to get calls from potential clients that start with them saying they know we don’t like joint ventures and then explaining why their doing a joint venture is either necessary or will be different from the ones we write about. Are we losing joint venture legal work because of this reputation or do we get more such work because people believe that if we give their joint venture the go-ahead it really is as good as they think it is. Though we will never know, we can at least try to clear the air. So just to be clear: we like appropriate or necessary China joint ventures but we think it a mistake to consider a joint venture as the default method for entering China.

Of all the China legal work my law firm does, setting up and dismantling joint ventures is probably my favorite. I like it because each joint venture is so different and yet all are intellectually challenging. I also like them because they tend to be one of our most lucrative corporate matters we do. We charge a flat fee for about half our China work, but we always charge hourly for joint ventures because setting up a China joint venture can range from fast and easy to difficult and contentious.

Few joint ventures are fast and easy. A joint venture consists of two independent businesses — one foreign and one Chinese — going into business together. That alone ought to tell you how difficult they can be. The most difficult questions usually center around control. Which of the two companies will control what? What really needs to be done to ensure control? What can be done to ensure neither company goes out of control?

Just to be clear, we love forming joint ventures, but only when they truly do make sense and well over half the time we end up counseling our clients against doing the joint venture. Just today I had the following conversation with a potential client (modified ever so slightly for dramatic effect):

Me: I am not clear from your email about what exactly you want to do with your Chinese manufacturer but it sounds like you want to enter into a joint venture with them and that will almost certainly be a bad idea.

Potential Client: Well, we do want to further solidify our relationship with them and we have been thinking a joint venture might be one way to do that. So why do you think it is such a bad idea.

Me: Jokingly, did I say I thought it a bad idea? I think it’s a great idea and here’s why. You will pay us anywhere from $15,000 to $85,000 now to set it up — the more you pay us the less likely it is to actually happen. And then the odds are good that in 3-4 years you will pay us another $50,000 or so to shut it down.

I hope I am doing a good job pitching this to you. Do you want to move forward?

Potential Client: I’ll take two.

Me: Perfect.

Our China lawyers also love taking apart China joint ventures that have gone wrong, and again, not for because it is in any way a good thing for our clients, who usually are in dire straits when they come to us with their joint venture problems, but because resolving joint venture disputes is like a championship chess game, but at our hourly rate.

The problem with China joint ventures is not China-specific; it is joint venture specific. Joint ventures simply tend too to be a bad way to conduct business. Our international lawyers have seen this up close and personal with Russian joint ventures, Vietnamese joint ventures, Mexican joint ventures, Korean joint ventures, Japanese joint ventures, even a Gambian joint venture. Marketing genius Seth Godin beautifully explains why this is the case in his post, “Why joint ventures fail so often“:

There are two reasons joint ventures fail. The joint part and the venture part.

All ventures are risky, because they involve change and the unknown. We set off on a venture in search of something, or to make something happen –- inherent in the idea of a venture is failure. It’s natural, then, for fearful people on both sides of a joint venture to back off when it gets scary. When given a choice between a risk and sure thing, many people pick the sure thing. So any venture begins with some question marks.

The joint part, though, is where the real problem arises. Pushing through the dip is the only way for a venture of any kind to succeed. The dip separates projects that begin from projects that finish. It’s easy and hopeful and exciting to start something, but challenging and often painful to finish it. When the project is a joint one, the pressure to push through the dip often dissipates. “Well, we only have a bit at stake here, so work on something else, something where we have to take all the blame.”

Because there isn’t one boss, one deliverable, one person pushing the project relentlessly, it stalls.

Every joint venture involves meetings, and meetings are the pressure relief valve. Meetings give us the ability to stall and to point fingers, to obfuscate and confuse. If a problem arises, if a difficulty needs to be overcome, it’s much easier to bury it at a meeting than it is to deal with it.

In my experience, you’re far better off with a licensing deal than a joint venture. One side buys the right to use an asset that belongs to the other. The initial transaction is more difficult (and apparently risky) at the start, but then the door is open to success. It’s a venture that belongs to one party, someone with a lot at stake and an incentive to make it work.

Only one person in charge at a time.

Godin is 100% right.

 

On February 4, 2019, The American Institute of Steel Construction, LLC (Petitioner) filed antidumping (AD) and countervailing duty (CVD) petitions against Fabricated Structural Steel (“FSS”) from Canada, China and Mexico. You can see that petition here.

Under U.S. trade laws, a domestic industry can petition the U.S. Department of Commerce (“DOC”) and U.S. International Trade Commission (“ITC”) to investigate whether the named subject imports are being sold to the United States at less than fair value (“dumping”) or benefit from unfair government subsidies.  For AD/CVD duties to be imposed, the U.S. government must determine not only that dumping or subsidization is occurring, but also that the subject imports are causing “material injury” or “threat of material injury” to the domestic industry.

Scope

The proposed scope definition in the petition identifies the merchandise to be covered by this AD/CVD investigation as the following:

The merchandise covered by this investigation includes carbon and alloy (including stainless) steel products such as angles, columns, beams, girders, plates, flange shapes (including manufactured structural shapes utilizing welded plates as a substitute for rolled wide flange sections), channels, hollow structural section (HSS) shapes, base plates, plate-work components, and other steel products that have been fabricated for assembly or installation into a structure (fabricated structural steel). Fabrication includes, but is not limited to, cutting, drilling, welding, joining, bolting, bending, punching, pressure fitting, molding, adhesion, and other processes.

Fabricated structural steel products included in the scope of this investigation are products in which: (1) iron predominates, by weight, over each of the other contained elements; and (2) the carbon content is two percent or less by weight.

Fabricated structural steel is covered by the scope of the investigation regardless of whether it is painted, varnished, or coated with plastics or other metallic or non-metallic substances. Fabricated structural steel may be either assembled; disassembled, but containing characteristics or items, such as holes, fasteners, nuts, bolts, rivets, screws, tongue and grooves, hinges, or joints, so that the product(s) may be joined, attached, or assembled to one or more additional product(s); or partially assembled, such as into modules, modularized construction units, or sub-assemblies of fabricated structural steel.

Products under investigation include carbon and alloy steel products that have been fabricated for erection or assembly into structures, including but not limited to, buildings (commercial, office, institutional, and multi-family residential); industrial and utility projects; parking decks; arenas and convention centers; medical facilities; and ports, transportation and infrastructure facilities.

Subject merchandise includes fabricated structural steel that has been assembled or further processed in the subject country or a third country, including but not limited to painting, varnishing, trimming, cutting, drilling, welding, joining, bolting, punching, bending, beveling, riveting, galvanizing, coating, and/or slitting or any other processing that would not otherwise remove the merchandise from the scope of the investigation if performed in the country of manufacture of the fabricated structural steel.

Fabricated structural steel may be attached, joined, or assembled with non-steel components at the time of importation. The inclusion, attachment, joining, or assembly of non-steel components with fabricated structural steel does not remove the fabricated structural steel from the scope.

All products that meet the written physical description are within the scope of this investigation unless specifically excluded. Specifically excluded from the scope of this investigation is certain fabricated steel concrete reinforcing bar (“rebar”). Fabricated rebar is excluded from the scope only if (i) it is a unitary piece of fabricated rebar, not joined, welded, or otherwise connected with any other steel product or part; or (ii) it is joined, welded, or otherwise connected only to other rebar.

Also excluded from this scope is fabricated structural steel used for bridges and bridge sections. For the purpose of this scope, fabricated structural steel used for bridges and bridge sections is defined as fabricated structural steel that is used in bridges and bridge sections and that conforms to American Association of State and Highway and Transportation Officials (“AASHTO”) bridge construction requirements or any state or local derivatives of the AASHTO bridge construction requirements.

Also excluded from this scope are pre-engineered metal building systems. For the purposes of this scope, pre-engineered metal building systems are defined as complete metal buildings that integrate steel framing, roofing and walls to form one, pre-engineered building system and are designed and manufactured to Metal Building Manufacturers Association guide specifications. Pre-engineered metal building systems are typically limited in height to no more than 60 feet or two stories.

Also excluded from this scope are steel roof and floor decking systems designed and manufactured to Steel Deck Institute standards.

Also excluded from the scope are open web steel bar joists and joist girders that are designed and manufactured to Steel Joist Institute specifications.

The products subject to the investigation are currently classified in the Harmonized Tariff Schedule of the United States (HTSUS) under subheadings: 7308.90.9590, 7308.90.3000, and 7308.90.6000.

The products subject to the investigation may also enter under the following HTSUS subheadings:  7216.91.0010, 7216.91.0090, 7216.99.0010, 7216.99.0090, 7228.70.6000, 7301.10.0000, 7301.20.1000,            7301.20.5000, 7308.40.0000, 7308.90.9530, and 9406.90.0030.

The HTSUS subheadings above are provided for convenience and customs purposes only. The written description of the scope of the investigation is dispositive.

 

Alleged AD Margins

Petitioner estimated dumping margins of up to 31.46% for Canada, 218.85% for China, and 41.39% for Mexico.

Although Petitioner alleged numerous government subsidy programs that benefitted the Canadian, Chinese, and Mexican FSS industries, Petitioner did not allege specific subsidy rates.

 

Named Exporters/ Producers

Petitioner included a list of companies it believes are producers/exporters of the subject merchandise. You can see that list here.

 

Named U.S. Importers

Petitioner included a list of U.S. importers it believes to have imported the subject merchandise.

 

Estimated Schedule of Investigations

February 4, 2019 – Petitions filed

February 25, 2019 – DOC initiates investigation

February 26, 2019 – ITC Staff Conference

March 21, 2019 – ITC preliminary determination

July 5, 2019 – DOC CVD preliminary determination (assuming extended deadline)

September 3, 2019 – DOC AD preliminary determination (assuming extended deadline)

January 16, 2020 – DOC final determination (extended and AD/CVD aligned)

March 1, 2020 – ITC final determination (extended)

March 8, 2020 – DOC AD/CVD orders issued (extended)

 

If you are on one of these lists or you fear you should start preparing to respond.

 

Closing a China WFOE
Closing a China WFOE: Just fading away is a bad idea.

For reasons that ought to be apparent to anyone who reads the news, our China lawyers have of late been getting a whole host of emails from foreign companies looking to shut down or just flee from their China WFOEs. Reduced to their essence, these emails usually focus on one of the following questions:

  1. How do I do it correctly?
  2. If I don’t do it correctly, what are the possible repercussions? Will I be safe in China?

We will answer both questions in this post.

PRC law requires all corporations (foreign and domestic) follow a formal de-registration procedure be followed. When a WFOE is simply abandoned, the annual registration procedures and tax filings will not be conducted. As a result, the business license of the WFOE will be revoked (吊销). Abandoned WFOEs typically have their licenses revoked for failing to complete their annual registration requirements (such as the annual audit and payment of fees) or for failing to file their annual tax return and paying the taxes due. In most cases, the revocation is for both.

When a license is revoked, the following is required:

  • The WFOE must immediately cease doing business. All websites and other public announcements where the company offers to do business in China must be taken down.
  • The official company seals must be collected and deposited with the licensing authority.
  • All taxes and fees owed to the national and local governments must be paid.
  • All salary owed to employees must be paid.
  • The WFOE’s legal representative and directors must immediately liquidate the company in accordance with China’s Company Law and local procedure. All company assets must be used to pay creditors in accordance with the liquidation procedure. Use of the company assets for any other purpose is a crime.

Though liquidation can be used to equitably extinguish the debts of normal creditors, it is usually impossible to formally liquidate a WFOE if it owes taxes or employee salaries.

Failing to properly liquidate a WFOE results in penalties imposed on the management and the shareholder(s) of the company. The legal representative and the other directors (but not the general manager) are personally liable for any damages caused to creditors by the WFOE’s failure to comply with China’s WFOE liquidation requirements.

For improperly liquidated WFOEs, the first step by the Chinese government is to put all potentially liable parties on a “black list.” This includes the legal representative, the directors and the shareholders. Though the general manager is technically not liable, the name of the general manager often goes on the blacklist as well and we have seen instances where random high level employees make it on the list too. This blacklist goes to all SAIC (State Administration for Industry and Commerce) offices in China and to the PRC border control authority. Being placed on this blacklist usually means the following:

  • The legal representative will not be permitted to act as a director, manager or supervisor of a Chinese company for three years from the date of the WFOE’s revocation.
  • The shareholders of the WFOE will not be permitted to invest in another Chinese company for three years from the date of the WFOE’s revocation.
  • The name of the WFOE cannot be used for a period of three years from the date of revocation.

The above is happens when the WFOE does not owe any taxes, fees, salaries or debts. If the abandoned WFOE owes any taxes, fees, salaries or debts, the situation is far more serious. In this situation, the PRC authorities may criminally prosecute the legal representative and the directors of the company for having failed to make the required payments. Failing to pay taxes is a crime in China and failing to properly liquidate is also a crime when that failure involves not properly paying creditors as provided by China’s WFOE liquidation rules.

Even if no crime has been committed, it is nearly impossible for a person or entity put on the blacklist to engage in investment or company management in China and it is also common for Chinese border authorities to refuse entry to the named person. If a crime has been committed, China will usually allow the person to enter China and then immediately arrest him or her for remand to the local authorities for prosecution. Our China attorneys have heard of many instances where key WFOE personnel were held hostage by their China creditors until their debts were fully paid. See How to Avoid Being Detained in China.

Fortunately, the process for proper WFOE de-registration and liquidation has become more systematic and easier to handle in China. For WFOEs that have paid their fees, do not owe taxes, and have paid their employees and their creditors, de-registration and liquidation is now a relatively straightforward process.

Bottom Line: If you need to shut down your China WFOE, follow the rules. If you ever want to set foot in China again, there is no alternative.

WeChat for China Employers and employeesWith widespread use of WeChat in China (it is China’s leading multi-purpose messaging, social media and mobile payment app by far), both employers and employees need to be careful with what they do and say on there. Put simply, what you say or write on WeChat may be used against you in an employment dispute. There have been written Chinese employment decisions where an employer used evidence from WeChat (such as screenshots of an employee’s WeChat posts) to prove employee misconduct and to thereby justifying discipline/termination decisions (see here). And our China employment lawyers have been involved in many matters where WeChat communications were used to influence a settlement.

Let’s consider a fairly recent case in Ningbo City. One day after 10 pm, a supervisor sent a WeChat message to an employee working as a store manager requiring the store manager provide the current month’s store sales data within ten minutes. The employee was pregnant at the time and had gone to bed early that night and did not respond within the deadline. After the 10-minute ultimatum had passed, the supervisor notified the employee on WeChat that she was fired for failing to respond in time. The employee sought help from the local workers’ union which offered her legal aid and in short, the final outcome is that the employer and the employee reached a settlement where the employee received a generous amount of severance for the termination.

Also, note that the employee being terminated in the case above was pregnant. It is worth emphasizing (again) that female employees with a special status such as pregnancy are given heightened protection in China and terminations of such employees are almost always tricky and complicated. The employer should have thought long and hard before terminating the employee even if the employer had been justified in making the unilateral termination decision in the first place. Moreover, note that there are restrictions on arranging overtime for pregnant employees.

The moral of the story does not stop there though. If you are an employer in China, you should be careful with how you use WeChat with your employees. Just to give a few examples, many of which our China employment lawyers have seen, some frequently.

  1. Do not send an employee work outside normal work hours via WeChat that requires an immediate response or turnaround, because that sets you up for overtime claims/liabilities.
  2. Do not amend the terms of an employment contract via WeChat. You should either sign an amendment to the employment contract in hard copy or sign a new contract in hard copy. In fact, you should not negotiate with the employee regarding the amendment on WeChat in the first place. It is just too tricky to know what of what you do on WeChat will actually count for the contract and this is not usually going to be the sort of “paper trial” you are going to want showing up in a court in any event.
  3. If you constantly check in with a part-time employee via WeChat regarding work, you may be deemed to have converted that part-time employee to a full-time employee by making the employee work beyond the statutory maximum hours allowed for part-time employees. This conversion may expose you to all sorts of problems and risks.
  4. Do not issue employee discipline via WeChat. For example, if you issue a notice of suspension of employment, do it in hard copy and deliver the notice in person to the employee and have witnesses who can attest to the delivery. Sending something via WeChat will allow an employee to claim never to have received it or to claim not to have known it to be real or even not to have taken it seriously.
  5. If you need to express your concerns about an employee’s performance formal documentation of the employee’s performance issues and a corresponding improvement plan should be prepared. Just sending out a WeChat is likely not going to count before a court or other employment tribunal.

As a general matter, WeChat does not work well for record retention. Also, since WeChat is an instant chatting tool, people far too often fail to take the necessary time to think carefully before they hit send. As a China employer, you will almost always be held to a high standard and this high standard will apply even to something like WeChat. You should assume that whatever a company supervisor or higher up sends out via WeChat can and will be used against your company in a dispute. Sometimes what you do on WeChat will decide the case against you. Sometimes it will tip the evidence against you. Other times, it will “merely” make you look bad and cause the judge to want to rule against you, which in turn can lead the judge to rule against you. And if you think your ability to “retract” a WeChat message within a couple of minutes is going to save you, think again. First off, you may not always able to do so quickly enough. Second (and trust me on this one), there is a really good chance that whomever you sent the offending WeChat message will already have seen it and taken a screenshot and saved it. This is how many celebrity scandals start; someone posts something on WeChat and then deletes it within a minute, but it is already too late. Keep in mind also that WeChat messages are not secure and can easily be accessed by Chinese government authorities (and others).

Most importantly, nearly all WeChat communications/correspondence have not been reviewed by the real powers at your company nor approved by your China employment lawyer before they go out and potentially expose your company to regulatory/liability/lawsuit risks. Your company’s general rule should be to limit labor management via WeChat as much as possible.

What have you seen out there?

China employment lawyer

Though China employers are generally not allowed to impose a penalty on an employee who causes his or her employer economic losses, the employer can require the employee compensate the employer for such losses by deducting funds from the employee’s wages. Nonetheless, because wage deductions are a big deal for China employees, special care by employers is required — just as with pretty much anything else involving China employees.

If a China employer is to succeed with deducting from an employee for economic loss, it should be sure to do the following so as to be able to prevail if sued by the employee:

First, the employer will need to be able to show all of the following: (1) the employee’s act caused the employer losses; (2) the basis for calculating the losses; and, (3) the amount of such losses. In other words, if challenged by the employee, the employer needs to be able to meet its burden of proof and failing to do so means the employer will be ordered to return the deducted amount to the employee.

Next, some locales require the employer provide the employee with advance written notice (times may vary) specifying the reason for the deduction and the amount to be deducted. Regardless of whether the employer’s specific locale imposes such a requirement, our China employment lawyers virtually always recommend to our employer clients that they provide a written notice regarding the wage deduction and seek to get the employee to acknowledge receipt of such notice before they proceed. Frankly, much of the time our recommendation is that the employer not even bother with the deduction because the risks outweigh the rewards.

Third, depending on the amount involved, usually the best way to proceed with an employee deduction is to break it out in equal monthly installments. This is because in many places employers are only permitted to deduct only up to 20% of an employee’s monthly wage. Further, the employer cannot deduct from an employee’s wages an amount that would cause the employee’s wages to fall below the local minimum wage. Moreover, some local rules mandate employers ensure their employees receive enough wages to cover expenses related to basic living needs, child care/education and elderly support, so you need to be sure the deduction will not bring you out of compliance with this rule. Provided an employer meets all applicable legal requirements, it can deduct from an employee’s wages every month until the amount that employee owes the employer has been paid in full or until the employee has left the company.

Fourth, if by the time the employment relationship is terminated the employee still owes the employer money, the employer can demand the employee make a one-time payment to the employer for the outstanding amount.

An employer can bring a legal action against an employee for damages caused by the employee, however in practice even if the employer meets its burden of proof, the court will consider a number of factors and balance the interests of both parties in determining the amount of the award, such as the employee’s intent (gross negligence vs. intentional misconduct), the employee’s wrongdoing, the amount of the employer losses, the employee’s income and ability to pay, any employer measures taken to prevent the potential loss, any employer trainings provided, whether the employer should bear this sort of risk during its normal course of business (the courts generally do not like the employer trying to impose such business risks on the employee). The employer rarely is awarded the full amount of damages it seeks.

The bottom line with employee deductions is that you as the employer should be careful in choosing your legal battles, especially now with China so worried about its economy. Do you have good evidence to support your claim for being able to deduct? Is it worth you spending the time and money and effort to pursue an employee for a small amount you probably will not be able to recover in full anyway? If you win in court will you be able to enforce the judgment against the employee? If the answer is no to these questions, you should probably just move on.