China Drug Registrations to be Centralized in Beijing

One thing our China lawyers are often asked to assist with is product registration with China authorities to allow import and sale of pharmaceutical products in China. Often these foreign pharmaceutical companies manufacture their drugs in other countries so these must be properly registered before sales within China. Recent regulatory changes reflect the government’s efforts to centralize pharmaceutical product approvals.

The system used to require a clinical study and report to be completed and included in application documents submitted to a local approval authority for approval of the drug. Then, the local reviewing authority would perform an examination and make a whether to approve the drug registration.

Earlier this year the China Food and Drug Administration published a draft regulation revising application and review procedures for approval of new pharmaceutical products. According to the new regulation, starting December 01 2017, all applications for new drug approvals shall be submitted to the China Food and Drug Administration in Beijing.

If the current draft regulation is approved, all applications for approval of pharmaceutical products for import and sale into China will be handled from the new review office in Beijing. This review office is actually not far from the firm’s location in Beijing. As application document will need to be properly prepared and submitted in Chinese, foreign companies are recommended to utilize a local agent skilled in pharmaceutical product registrations to coordinate this process with the China Food and Drug Administration.

Published by Crys Zheng on September 19th, 2017 tagged Uncategorized | Comment now »

Is your China Joint Venture Prepared for a Shareholder Lawsuit?

In our previous blog post, we reviewed new rules set by recent guidance from the People’s Supreme Court designed to resolve and avoid irregularities in corporate decision making process. In this post, we will discuss rules put forth by the court detailing the protection of a shareholders’ legal right to know, or to be provided with important company documentation.

There are only 3 articles addressing a shareholder’s right to know within the Company Law. Yet, as a practical matter, disputes between shareholders, and particularly where a minority shareholder seeks greater access to company documentation or decision making, is a key area of dispute encountered by our China lawyers.

The new rules in the Provisions firstly provide that the plaintiff initiating a the lawsuit in order to enforce the right to know, or to gain access to certain documentation of the company should hold a position as the shareholder of the company at the time when the lawsuit is filed. A former shareholder whose interests were damaged while serving as a shareholder of the company, may also have a claim over certain documents which were generated during the period when it held the position as the shareholder. If neither of these conditions is met, then a claim seeking access to such corporate information will be rejected by the court.

Secondly, the Provisions specify that the right to know is legally conferred on shareholders, but may be voided where the company many prove that the shareholder claiming to enforce the right to know has any “unjustified purpose”, such purpose might be to sell the company’s information to a third party. The Supreme Court does list several specific situations which would qualify as an “unjustified purpose” in an effort to avoid further controversy on that point.

The company may not refuse the shareholder’s request to review or copy certain company’s documentation, and may not avoid such shareholder right by entering into contract with any shareholder or incorporating a restriction into the company bylaws.

Thirdly, the new Provisions indicates that Directors and senior management of the company bear personal civil liability to compensate any losses suffered by any shareholder due to incomplete production or storage of certain documents.

As China lawyers, we recommend companies to prepare, review and preserve company documents, including the Article of Association, Minutes of meeting of Shareholders, Resolutions of Board of Directors, Resolutions of Supervisors, Financial Reports, Accounting Books, Name List of Shareholders and the Company Bond Receipts in a proper manner to cope with any future requests raised by shareholders.

It is also important for minority shareholders, particularly in Joint Ventures to keep in mind these legal rights. As Shareholder disputes are the primary cause of Joint Venture failure, knowing your rights and carefully enforcing your rights, is essential for majority and minority shareholders alike.

Published by Crys Zheng on September 5th, 2017 tagged Uncategorized | Comment now »

New China Supreme Court Rule Provides Legal Avenue for Addressing Irregularities in Corporate Decision Making Process

On August 5, 2017, the Supreme People’s Court issued its 4th edition of Provisions concerning the application of the Company Law by people’ courts. The new provisions address several issues including the validity of company resolutions, shareholder’s right to know, right to distributions of profits, preferential rights to purchase shares, and shareholder’s derivative actions. The new Provisions will come into force on September 1, 2017.

In considering corporate resolutions, the court identified three common defects which may occur and affect the validity of a company’s resolution. Company resolutions displaying these defects may be found void, revocable or false. Currently, the Company Law only specifically addresses dealing with void and revocable resolutions within a few narrow circumstances, but does not prescribe in detail procedures for overturning faulty resolutions, particularity where various factions in the company may be in dispute. The Court now aims to expand the range of circumstances in which resolutions may easily be determined void, revocable or outright false, so as to avoid prolonged disputes.

To this end, the new Provisions explicitly and formally confer the right on shareholders, Directors and company Supervisors to initiate a lawsuit before people’s court against false or invalid resolutions. A Company which issues a false resolution shall be listed as the defendant in such lawsuit, and any interested party which may be involved in such false resolution may be listed as a third party in the lawsuit.

Furthermore, the Provisions explicitly provide the circumstances under which the party may claim to the court that an issued resolution should be deemed false. These circumstances cover the situations where no actual meeting was held by shareholders or directors for issuing the resolution in dispute, where no actual voting was made on the matter involved in the resolution in dispute, where the number of attendants of the meeting or voting rights held by shareholder did not comply with the quorum requirements stipulated in Company Law or in Article of Association of the company, where voting result did not reach the proportion provided in Company Law or in Article of Association required for the resolution to pass.

As China legal practitioners, the new Provision will facilitate us in acting for our clients against false resolutions, particularly in the case of minority shareholders. Also, we encourage China companies to consult with legal counsel when making any significant corporate decision to ensure that formalities of the decision making process, including as to shareholder’s and board meetings and attended resolutions are met.

Published by Crys Zheng on August 31st, 2017 tagged Uncategorized | 1 Comment »

A China Company by Any Other Name Would Smell as Sweet Co. Ltd.

Some clients want to establish a company in China with a very unique or attractive name designed to attract customers’ attention. This practice has been viable in the past, but going forward this approach might encounter some problems.

In general, the name of a company should be decent and formal. As China lawyers, a common practice we see is companies named after the founder, such as “Ford” or “Boeing”. These names are often easily transliterated it into Chinese as the trade name of a new China company. We also often suggest our clients integrate key words of its main business or industry into the name of their China company, in fact this is a requirement under Chinese regulations.

However, company names such as “Beijing is afraid of his wife Technology Co., Ltd.”, “Guangxi Nanning King and His Friends Trading Co., Ltd.” and a company named as “Baoji has a group of youths who bear dreams and believe that life may be created under the leadership of Uncle Niu Magic Network Technology Co., Ltd.” and other weird company names incredibly registered well before local AICs have gained notoriety.

In order to strengthen the supervision on registration of company name, the State Administration of Industry and Commerce ahs issued its rules for prohibiting and restricting use of certain strange enterprise names. According to such rules, overly long and bizarre names will be prevented from being approved by local AICs. The rules also prohibit the registration of names which refer to terrorism and extremism, as well as those that attempted to copy the names of any existing enterprises.

The rules are very detailed in regulating and restricting the order, format and composition of the enterprise name which would not be easily understood by a foreign investor. A big problem for foreign investors is that the Chinese name of the new company may become weird after being simply translated from English. For those foreign investors who have doubt or are hesitate in making any decision on the names of their new China company, China lawyers may be of assistance in clarifying any terms in such rules and making the key words translated properly and fit for registration.

Published by Crys Zheng on August 22nd, 2017 tagged Uncategorized | Comment now »

Selling Your Products in China: The Franchise Model

We have had many clients ask our China lawyers to recommend the best way to sale their products on the China market, while avoiding large capital investments and the time and costs of establishing a market presence and recruiting and training an effective work force. These clients simply want to sell their product in China in a fast and effective way. For these clients we suggest a franchise model.

China has substantially opened the franchising market since 2007. It is allowed by law and regulations for a foreign franchisor to establish a franchise in China utilizing its own registered trademarks, enterprise logos, patents, proprietary technologies or any other business resources licensed to a domestic franchisee in China. To become a qualified franchisor, the foreign enterprise shall present fully-developed business plan  and must have the ability to provide operational guidance, technical support, and service training to the franchisee on continuous basis. Also, a franchisor shall have, as a minimum, two directly-managed overseas outlets, each with one year of business operation as so required by Chinese laws and regulations.

When conducting the franchising activities, a written franchising contract is concluded by the foreign franchisor and domestic franchisee. The foreign franchisor shall be responsible for completing the filing with local commerce authority within 15 days of their first conclusion of a franchising contract. Several additional legal documents must be have to be submitted to the authority for examination. Our China lawyers are experienced in preparation of the required documentation to avoid any delay in the process.

The franchise model may be designed either through a single unit franchising, a master franchising or an area development franchising. Each type of franchising has its unique advantages and disadvantages that an experienced China lawyer can easily explain. Our China lawyers may be of great assistance in advising the franchisor as to the best way to operate franchising according to the franchisor’s cost budget, risk tolerance power and other factors. Also, the China lawyers will be essential in developing a plan to protect the franchisor’s IP rights, commercial secrets and other intangible assets in the course of franchising operation.

Published by Crys Zheng on August 16th, 2017 tagged Uncategorized | Comment now »

Everything You Need to Know About Commercial Debt Collection in China

Debt collection in China can be messy and costly. However, at some point almost every business owner operating in China or foreign businesses dealing with China will need to deal with unpaid accounts. Fortunately, our China lawyers know all the steps which can be taken in accordance with Chinese laws, policies, and regulations that may help such collection run smoothly. Debt collection may be pursued through a process of direct negations with the target company or by filing a litigation or arbitration. We highly recommend preventive action that can be taken to help prevent the need to collect debt in the future.

In many cases brought to our China lawyers, the client seeks to collect on amounts less than USD $100,000 owed by a China company. This is not as straightforward as you may imagine. A lot will depend on the supporting documentation. This includes any formal contract, and any email communications, purchase orders, or bank transfer documents that evidence the transactions at issue.

Often supporting documentation available is not sufficient to support a debt collection action in China. We find business owners often take what they see as a practical approach, rather than a legal approach to China transactions. In many cases there is no underlying written contract, and the “deal” between the foreign company and the Chinese company is represented across a series of emails. Often, where there is a contract, it is only in English, applies foreign law, attributes jurisdiction over the matter to foreign courts, or is not properly executed by the Chinese company. Any one of these issues will make your agreement useless as far as eventually enforcing against a Chinese company.

The worst and most common mistake is using the Chinese company’s “English name” to identify it in the agreement. In China an English name has no legal significance and is not registered anywhere. When a Chinese company uses an English name, this purely for purposes of marketing themselves to potential foreign customers. The company’s true official name is registered in Chinese characters. Often due to translation issues, it will be impossible even to identify the correct Chinese company which matches the English name provided. In fact there is nothing stopping a Chinese company from using an English name that has absolutely no connection with their real Chinese name. Our China lawyers see this all the time.

There are no debt collection agencies in China, at least no legal ones. There are likewise no credit reporting agencies. Police will not become involved in such payment disputes (unless the value is in the millions of USD), seeing them as primarily commercial disputes and not a criminal issue. Often where clients seek to report such commercial “theft” to the police, we advise the client this is a waste of time and money.

Litigation or arbitration is costly, expenses can quickly exceed the value of many commercial debts. Chinese companies know all of this, and use it to their advantage. Length of time to file a suit will depend on the process of gathering evidence. Any documentary evidence originating overseas is required to be notarized and authenticated. We would normally allow 1 to 3 months for litigation preparation and filing. The statute of limitations for commercial disputes is two years.

The first step of a Chinese debt collection is to perform due diligence as to the supporting documentation and the Chinese company. This consists of a review of the underlying documentation picking out company identifying information, and performing a search for the real company which matches the available information. If the correct Chinese company cannot be identified from the supporting documentation, it is in most cases not worth pursuing the debt collection further. This due diligence process must be performed by a China lawyer who knows what they are looking for.

If the decision is made to proceed with the debt collection, we prepare a demand letter, and initiate direct discussions with target company. For all the reasons above, Chinese companies are resistant to payment on such debts, even after receiving a demand letter.

We recommend clients focus on prevention to avoid situations which would lead to the requirement to collect debts in China. The first step of prevention is having an effective China enforceable contract that clearly describes payment processes and procedures, and minimizes prepayments which would put the foreign company at a disadvantage. We recommend up front due diligence in each case to identify all important identifying information about the target Chinese company, so that information is available to ensure the agreement is prepared and executed properly so as to ensure effective enforcement against the China company should the need arise.

Published by Jacob Blacklock on August 15th, 2017 tagged Uncategorized | Comment now »

Ensuring Effective Rules for your China Company

Recently we helped one of our clients to win a labor related arbitration verses a former employee . One of the most important factors that allowed us to win the case is that the arbitration tribunal judged that the client’s company bylaws and rules were valid and the evidence we provided showed clearly that the employee had broken them. The client thanked us not only because we win this particular employment dispute, but also because our firm helped this client to formulate valid company bylaws and rules at the very beginning when their China company was incorporated.

Most companies formulate their own bylaws and rules, thinking they do not need a Lawyer to do this for them. However these internally formulated rules are almost always not effective for China and do not accomplish what a China company needs from its internal regulations. Moreover, may foreign companies simply import their corporate bylaws from their home country, in such situations it is difficult to ensure these bylaws are valid and will be enforceable by a court or the arbitration tribunal in case of a dispute.

According to the China Labor Contract Law and relevant Judicial Interpretations, the requirements for formulating the company bylaws are generally as follows:

  1. The Contents of the bylaws must within the requirements of the present laws and regulation;
  2. The procedures of formulating such bylaws must legitimate. There are a lot procedural requirements for formulating the company rules, for example, the rules must be determined after consultation with the labor union or employee representative on the basis of equality and must go through the publicity process. Internal company bylaws almost never complete this process appropriately.
  3. The articles of the bylaws must be reasonable.
  4. There can be no retroactive applicability.

To formulate effective company bylaws requires legal knowledge and experience. If you are not sure about whether your company’s bylaws are valid or not, contact our China lawyers to  review your China company’s regulations.

Published by Bonnie Zhang on July 27th, 2017 tagged Uncategorized | Comment now »

Rare Window of Opportunity for Foreign Performance Acts to Establish in Beijing

We have been consulting with a well known entertainment company in establishing a Wholly Foreign Owned Enterprise with plans to become a performance brokerage institution in Beijing engaging in providing commercial performance services in China.

This is a tricky prospect as commercial performance business is listed as an industry   restricted to foreign investment on the Negative List for Access of Foreign Investments. Its presence on this list means that a Chinese party will be required to hold a majority of shares in any such venture.

So should we inform the client the WFOE is a no go?

Not quite. As China lawyers familiar with the latest Chinese laws, regulations and policies, we are refer to the State Council’s Temporary Adjustment for foreign investors in Beijing. This obscure regulation grants a foreign investor special exception to ignore the restriction on foreign investment in connection with a commercial performance brokerage business. This allows our China lawyers to proceed with establishment of the WFOE.

According to the Adjustment, there are four special areas in Beijing, including areas in Shi Jingshan District, Chaoyang District, Shunyi District and Pinggu District, where the registrations and approvals for a WFOEs engaging in commercial performance brokerage business are allowed to be accessed by foreign investors up until May 5, 2018.

Foreign applicants are required to own or rent a business office in any of such special areas, and must complete establishment registration with the local AIC as they would for any other kind of WFOE in Beijing. Additionally, they will be required to acquire a Commercial Performance Operation Permit from the local Culture Bureau and finalize other relevant post-registrations prior to May 5, 2018. This presents a lot of legal procedures for establishment of this kind of company prior to the deadline next spring.

There are now less than 10 months left for foreign investors in Beijing to enjoy the privilege of establishing a commercial performance WFOE. For those international players seeking to engage in commercial performance industry in Beijing, time is of the essence to engage a professional China lawyer and launch your project as soon as possible.

Published by Crys Zheng on July 25th, 2017 tagged Uncategorized | Comment now »

Standard-Essential Patents in China Now

Have Better Protection

The Beijing High People’s Court recently came out with new guidelines providing more detailed requirements for the protection of a standard-essential patent (SEP).

SEP is a patent that  claims an invention that must be used to comply with a technical standard.  Standards organizations, therefore, often require members disclose and grant licenses to their patents and pending patent applications that cover a standard that the organization is developing.If a standards organization fails to get licenses to all patents that are essential to complying with a standard, owners of the unlicensed patents may demand or sue for royalties from companies that adopt the standard. This happened to the GIF/TCP and JPEG standards, for example. Determining which patents are essential to a particular standard can be complex. Standardization organizations require licences of essential patents to be on fair, reasonable, and non-discriminatory (FRAND) terms.

Previously, the guidelines required that a SEP patentee should not be intentionally in breach of its obligation for licensing on FRAND terms. The guidelines, however, did not state what kind of actions violate the FRAND obligation. Moreover, the guidelines did not list the obligation of an accused party who requested FRAND patent license from the SEP patentee.

The new guidelines for patent infringement provide detailed of actions considered willfully violating the FRAND obligation. The new guidelines further require the accused party should also diligently negotiate in good faith. If there is no evidence proving that a patentee willfully violates its obligation and the accused party has no apparent fault in negotiation of a license, the court generally should refuse the patentee’s request for ceasing infringement upon receipt of a guarantee from the accused party. On the other hand, although not clearly stated in this new guidelines, we notice from a case from the Beijing IP Court (IWNCOMM VS SONY) that if the accused party has a clear fault, the court will regard it as a willful infringement and apply triple compensation.

This change in the law gives explanations regarding the protection of SEP and a more powerful protection therefor. It also provides clear rules for formulating a negotiation strategy under FRAND terms.

Published by Edward E. Lehman on July 24th, 2017 tagged Uncategorized | Comment now »

China “Prosecutors” to Initiate Public Interest Litigation

After two-year pilot program, on June 27, 2017, the Standing Committee of the National People’s Congress issued a new decision authorizing the people’s Procuratorate (similar to a Prosecutor’s Office) to engage in public interest litigation on behalf of the State. The new decision came into force on July 1, 2017. These public interest litigations are a welcome development in recognizing and enforcing public rights, in situations where individuals may otherwise be at a disadvantage. The public interest litigation represents a new form of “policing” by one government agency against others, and against private and state owned enterprises. This is expected, along with the high profile anti-corruption campaign, to make the government overall more effective, increase public trust in institutions, and ensure high profile Party members complete their jobs effectively.

The pilot program has been a two year project authorizing the people’s procuratorate to take part in the public interest litigation in Beijing, Nei Menggu, Jilin, Jiangsu, Anhui, Fujian, Shandong, Hubei, Guangdong, Guizhou, Yunnan, Shanxi and Gansu. As of June, 2017, the people’s procuratorate has dealt with 9053 cases involving public interest issues, wherein 1150 cases went as far as litigation. The People’s courts have concluded 458 cases and 437 of those were resolved in favor of the position taken by the people’s procuratorate.

Compared with the previous pilot program, the new program has enlarged the scope of qualifying public interest matters to confer the power on the people’s procuratorate to initiate a civil lawsuit against any act harmful to the protection of the ecological environment and public resources, and any practice in the food and drug safety field that infringes upon the legitimate rights and interests of consumers. The Procuratorate also gains the right to initiate a procuratorial proposal to the administrative authority to urge such authority to lawfully perform its duties as to supervision and management of the ecological environment and public resources, and enforcement of food and drug safety, protection of state-owned assets and lawful granting of land use rights for state-owned land. If such administrative authority subsequently fails to perform its duty in accordance with the law, the people’s procuratorate may then directly file an action against it at the People’s Court.

Published by Crys Zheng on July 19th, 2017 tagged Uncategorized | Comment now »