Clients, potential clients and/or the press are always asking our China lawyers what foreign companies doing business in China need to know to stay out of legal trouble. Since a client recently asked me to speak at his company about the legal issues of which it should be aware, I formulated the below checklist. This list is meant as a starting point and it is in no way exhaustive.

  • Are You Operating Legally?  China has all sorts of requirements for doing business in China. The basic (non-technical) rule is that If you are going to be doing business in China for anything more than weeks at a time, you probably need to form a legal entity to do so. This entity can be a WFOE, a JV, or a representative office. It is important to note that some businesses that are perfectly legal in the United States or in Europe are illegal in China.
  • Do You Have a Good Contract?  It almost always pays to have a written contract and it is usually best to have this contract be in Chinese. Generally speaking, if something is not spelled out clearly in your contract, there is a good chance a Chinese court will find it does not exist. If you want your Chinese counter-party to abide by your contract, you will likely want disputes resolved in China.
  • Are You Protecting Your Intellectual Property? Your intellectual property (IP) registrations in your own country do not generally extend to China. To secure protection of your trademarks and patents in China you must register them in China. China is actually pretty good at protecting trade secrets covered by a contract calling for their protection.
  • Is Your Company Bribing Anyone?  The United States vigorously enforces its Foreign Corrupt Practices Act (FCPA), which penalizes improper payments to foreign officials by US companies.  In certain situations, US companies can be liable under the FCPA for payments made by their Chinese partner.  Canada and most European countries have their own somewhat similar corrupt practices acts, as does China.
  • Are You Complying With Customs Laws?  A company recently called me about my law firm drafting sales contracts for their technology product. My first question to them was whether the US would even allow them to export their product to China. This question had never even occurred to them, but it turned out that exporting their product to China would be illegal under US law. Years ago, I was approached by a client ready to ship product to North Korea that would have violated US prohibitions on doing business with that country. The client was simply unaware of the law. Some products (certain types of software are a good example of this) can be sent to China only with a validated license. On the flip side, many products require special approvals to be imported into China and some cannot be imported at all.
  • Are You Violating Any Antitrust/Tax/Environmental/Labor Laws? Sorry to group all of these together, but if I analyzed them separately it would take ten blog posts.  Just make sure that you recognize that doing business internationally and with China means that you must always be thinking of these things and that Chinese laws on these can be very different from those to which you are accustomed.

Did I miss anything?

As I mentioned previously, I expect to be writing a number of posts arising from issues that were discussed at the recent Doing Business in China seminar I co-moderated last week.  At lunch, one of the attendees told me that they had been told by a higher up at a big U.S. retailer that they would not be going into China because they did not trust the government not to shut them down.

I pooh-poohed that, saying that the more likely reason was because this retailer knew that it would have no particular advantage in China and that it would be better off expanding elsewhere.  I then thought for a moment and added that I was not aware of a single foreign company that had been shut down in China when it was operating legally.  That evening I asked a number of the other speakers whether they were aware of an instance where the Chinese government had shut down a foreign company that had been operating legally in China and they too were not.  The odds of getting shut down in China are minimal if you are operating legally there.

Yes, China is and has been for some time stepping up its shut-downs of companies that are not operating legally there, but I just am not aware of an instance where it has done so to a foreign company that is abiding by its laws.

Are you?