How to deal with mass layoffs

Published by Christopher Fung on September 29th, 2016 tagged Uncategorized | Comment now »

Starting a China Company is About to Get a Whole Lot Easier

As of October 1, 2016, a new item will be added to China’s “WFOE Law” which will simplify formalities for establishing a foreign owned company in China. Other major changes such as dissolution, merger and extension of the operating period will also be made easier. The simplifier procedures mainly focus on the examination and approval procedures and requirements during review by the local Ministry of Commerce.

Previously, all these procedure required a lengthy examination and approval phase, which requires loads of application documentation and required up to 15 day sof official review time prior to approval. Going forward approval of most WFOEs will simply require a much quicker records filing process.

Based on what we know now the updated filing procedures will be primarily online submissions to the Ministry of Commerce. An acknowledgment of the submission should be received within 3 days.

Generally, after the National Holiday (Oct 1-7 2016), the procedures for WOFE establishment or change should be about 7 business days faster application procedure and documentation will be a whole lot simpler.

This seems to be part of a broader trend to make dong business in China easier for foreign companies, though it’s doubtful that companies not already seeking to enter China will see this as their cue.

Published by Bonnie Zhang on September 29th, 2016 tagged Uncategorized | Comment now »

The Conflict of Laws of the People’s Republic of China

Before the Law of the People’s Republic of China on Application of Law in Foreign-related Civil Relations was promulgated on Oct. 28th, 2010, there wasn’t a special law regulating the conflict of laws in mainland China. Back then, the conflict of laws was dispersed in different laws, such as Marriage Law, Contract Law, Tort Law etc. This law not only has adopted all the terms in relation to conflict of laws in different laws and categorized them under different chapters, but also has revised and refined them.

Taking the statue in relation to the conflict of laws in General Principles of Civil Law as an example, Article147 of such law simply stipulates that the marriage of a citizen of the People’s Republic of China to a foreigner shall be bound by the law of the place where they get married. It means the applicable law governing the validity of such marriage should be the law where the marriage is registered. In such case, to determine the validity of such marriage, we can only refer to the law of the jurisdiction where the marriage is registered. However in the Law of the PRC on Application of Law in Foreign-related Civil Relations, Article 21 has changed it into “Conditions for marriage shall be governed by laws of the jurisdiction where concerned parties both have residence”. It means to determine the validity of such marriage, the first choice would be the law of the jurisdiction where both parties have residence in, instead of the law of the jurisdiction where the marriage is registered.

For the conflict of laws involving foreign-related civil contracts, the new law has also made revision. We would make further explanations in the following articles.

Published by Tina Dong on September 28th, 2016 tagged Uncategorized | Comment now »

Being Smart About Choosing Applicable Law

As a foreign business entity or individual, when entering into an agreement with a Chinese business entity or individual, the first choice to be made should be choosing the applicable law for the pending agreement. In accordance with the Contract Law of the People’s Republic of China, the parties of an agreement involving foreign factors can choose the applicable law for the agreement. It means unlike a domestic agreement automatically governed by Contract Law of the PRC, a foreign-factor-related agreement does not have a clear applicable law, unless both parties can later on reach a mutual understanding, or a court or arbitration commission with jurisdiction makes a ruling on such issue. It further means when both parties have different interpretations on certain term of such agreement, the dispute could get further complicated because there is no clear applicable law for the agreement.

As a matter of fact, choosing the applicable law from the very beginning not only can avoid unnecessary disputes, but also can allow one party to make terms benefitting themselves at the best in accordance with the law chose in the agreement. A lot of things can go wrong when performing a contract, we need to eliminate as many uncertainties as possible before executing an agreement. Among all the uncertainties, the applicable law is the most fundamental one. One term could be valid in accordance with this law and invalid according to the same law from another jurisdiction. Therefore before entering an agreement with a foreign company or individual, consult with your lawyer to make sure you are on the right track before it is too late.

Published by Tina Dong on September 27th, 2016 tagged Uncategorized | Comment now »

Special Protections for Female Employees in China

Foreign companies doing business in China are often confronted with issues in connection with special protections provided for women employees under Chinese laws and regulations. Chinese laws outline special rights for women during pregnancy and for a time after birth.

Major laws and regulations which address these issues include: The Labor Contract Law of the People’s Republic of China, Special Provisions on Labor Protection of Female Employees, and the Law of the People’s Republic of China on the Protection of the Rights and Interests of Women. There are also local regulations to be followed which vary from province to province and city to city.

Women who are pregnant, or on maternity leave, may not easily be terminated as employees, even if there are legitimate reasons for termination that would otherwise apply. Women are also granted special leave during late pregnancy and during early child care. There are also special social insurance requirements to comply with.

Implementation of these special protections often causes confusion among employers regarding what the rights of the company actually are. As relevant regulations are not found in a single location, a clear understanding may only be obtained by review of several laws along with local regulations. Lehman, Lee & Xu’s skilled China Lawyers are familiar with China employment laws and the special protections granted to pregnant women and new mothers.

Published by Bonnie Zhang on September 26th, 2016 tagged Uncategorized | Comment now »

Tips for Importing Infant Milk Powder

China’s government and public pay more and more attention to food security these years, especially to the food for infants and children. Therefore, if a trade company wants to import infant milk powder into China, it needs go through more strict inspection procedures and more complicated register or record proceedings.

Recently, a client of us is considering doing this kind of business and asks me to do some legal research on this issue. After a simple glance at some relevant laws and regulations, I find this is quite a huge project. To get the qualification of importing infant milk powder, a foreign invested company needs to go through at least five authorities inspection or register and get more than five licenses or certificates. Obviously, it is impossible to list all the procedures in this article, therefore I just point out some special tips for infant milk powder import in inspection declaration procedure as a reminder for companies which are researching on this issue.

1. For importing infant milk powder, the date of inspection declaration must be more than three months earlier than then expiration date of quality guarantee period, otherwise the declaration would be rejected.

2. When inspection declaration, the infant milk powder must have been put in smallest packages for sail. It is forbid to import big package goods and then split them into small package.

3. The Chinese label of the infant milk powder must be printed on the smallest package before import.

My research is continuing and there will be more knowledge and tips on this issue. Hope that will be helpful for the client.

Published by Mike Wang on September 23rd, 2016 tagged Uncategorized | Comment now »

Shareholders Only Have Limited Liability? Not Always True

That shareholders only bear limited liability within the scope of their investment into the company is an essential idea of modern corporation system. However we have seen more and more cases in mainland China’s legal practice in “piercing the corporate veil”.

If the creditors of a limited liability company can prove that there is no clear delineation between assets of the Shareholder and of the Chinese corporation they own shares in, especially where  shareholders have misappropriated the corporation’s property, the shareholders will be held jointly liable for the corporation’s debt. Under the Corporation Law of the PRC, the Shareholder’s Meeting is the correct body to choose the management for a Chinese corporation, therefore they have the power to control the corporation by appointing management which will look after of the interests of the shareholders, rather than those of the Chinese corporation itself. Under Chinese law, these Directors and management, legally bear fiduciary duty to the Chinese corporation. This situation most commonly happens where a corporation has only one investor, whether a legal person or an individual. A sole shareholder finds it easily to manipulate operations of the corporation so as to hurt the creditor’s interests.

In past years, the legal practice in mainland China had tended to be conservative in such cases because piercing the corporate veil would deny the independent personality of a limited liability corporation, hurt the foundation of modern corporation system, and hinder economic development. However more recently, we have seen more and more judgments supporting piercing the corporate veil to hold shareholders accountable when the creditors can prove certain conditions have been satisfied.

When foreign investors set up shop in China, we often find that they play “fast and loose” with management of their WFOE, and enter into agreements which are not exactly “arms length” and are unfavorable to the WFOE. This helps make sure profits can easily be transferred outside of mainland China, beyond the government’s currency controls. If this is your typical modus operandi, you’ve been warned. The time is now to clean up your act because enforcement is only expected to get tighter. Shareholders of China WFOE’s are advised to talk to their China Lawyer before any major transaction involving their WFOE. Better to get it right now than to have these problems come back to bite you.

Published by Tina Dong on September 21st, 2016 tagged Uncategorized | Comment now »

Go for litigations with less cost and less burden

On September 12, 2016, the Supreme People’s Court promulgated its Several Opinions on Further Promoting the Separation of Complicated Cases from Simple Ones and Optimizing the Allocation of Judicial Resources. By virtue of these opinions, the Supreme Court calls for the establishment of the speedy trial in administrative litigations as well as utilizing and developing the existing speedy trial in civil and criminal litigations to expedite the judicial procedures.

The Opinions also target on exploring the implementation of the model trial on series cases or class actions. Besides, in order to reduce the litigation cost and speed the transfer of case files between courts at different levels or within different jurisdictions, the Supreme Court encourages the parties to the case and the counsels to provide digital legal instruments and materials during litigations. This really will lighten the load for the parties and the counsels since they have always been asked to provide and carry a huge bundle of documents to attend the court hearings even though the courtrooms are now equipped with high-tech digital devices and the portable devices are so developed far beyond our imagination. I remembered once we used more than 10 big paper boxes to hold the copies of evidence and used a handcart to move all of them into the courtroom. After spending time and cost on preparing and transporting those copies, the panel did not review them all. Actually, in most cases, only a few pages of an entire document were essential for the counsel to argue for their stances and for the panel to deliberate the case during the court session, and other pages are required to be copied just for satisfying the evidence submission requirements set up by the court.

Furthermore, the Opinions weigh and recognize the important role of attorneys in litigations. For the purpose of lowering the rates of false trial, the Supreme Court expects to utilize the leverage effects caused by the allocation of the attorney fee to induce the parties to cases rationally select appropriate legal ways to settle their disputes.  In the event any misconduct including abuse of litigious rights constituted by any party caused any damage to the opposing party or the third party, the party at fault should be required to bear the attorney fee according to the Opinions.

Published by Crys Zheng on September 20th, 2016 tagged Uncategorized | Comment now »

4 Major Considerations before Establishing a Direct Sales Operation in China

We’ve been getting a lot of inquiries recently from foreign companies seeking to break into the Direct Sales market in China. The Direct Sales license is one of the most challenging operational licenses to obtain in China in term of requirements for the investor, products and capital input. Based on past experience, the following is a list of major considerations any direct sales company should look at before attempting a China market entry.

Requirements for the investing company:

  1. Per Chinese laws, the investor establishing a Direct Sales enterprise must have a history of good standing for at least 5 years. This means no major criminal or regulatory investigations or penalties. For most companies, this is not a problem, though for some new companies the duration is an issue.
  1. The investing company must have direct sales experience out-side of China for at least 3 years. Again, for some companies the duration is a problem. If your company does not meet this requirement yet, it may be advisable to start up in places such as Hong Kong, and Taiwan. These “Greater China” jurisdictions can be helpful in introducing your product to the mainland Chinese market.

Financial Requirements:

  1. China has strict requirements as to capitalization for a Direct Sales enterprise. A Minimum registered capital of RMB 80 million is required which is not necessarily paid in full upon establishment, but must be officially recorded as registered capital. The company is legally liable up to the amount of its Registered Capital.
  1. There is also a minimum security deposit of RMB 20 million, which must be paid before establishment of the company. This may be refunded if the Direct Sales license is not approved. This deposit must stay in the company’s account for as long as it operates as a Direct Sales Enterprise.

If you company cannot meet these requirements, there may be other options for entry to the Chinese market to but Direct Sales within the PRC will be off limits until these requirements are met. If you would like to explore these other options, contact our China lawyers today.

Published by Jacob Blacklock on September 19th, 2016 tagged Uncategorized | Comment now »

Chinese Companies Go Abroad

I had a meeting not long ago with the CEO of a European company, the largest consumer electronics distributor in the company’s home country. In this meeting the CEO advised me that they already had a contract with a major Chinese electronics company for distribution in Europe, and they just wanted to confirm a few practical issues with the contract an make it was signed appropriately. The first thing I did was to ask whether they had the contract signed by the company in its real Chinese name, reminding the CEO that Chinese is the only official language of the People’s Republic of China and that the English name of a Chinese company is legally meaningless. I was not surprised at all when the CEO confirmed that the document only included an English name for the Chinese party.

Two weeks later this company contacts me again by email, providing a copy of the contract with the Chinese company. Turns out the company is established in Hong Kong, where English company names are perfectly valid. Hong Kong and People’s Republic of China (PRC) are two different legal jurisdictions. When talking to your China lawyer, make sure you are clear about the distinction and make sure everyone is on the same page about what you are talking about.

This company then asks our firm to perform due diligence on this Hong Kong company to confirm its links with the headquarters of this Chinese company in Beijing. A review of the Hong Kong company registration documentation indicates that the Hong Kong company was actually established by Cayman Islands company. A search of the Cayman Islands online company registry doesn’t provide information about shareholding or directors.

We had separately conducted due diligence investigation into the shareholders of the PRC headquarters and we have the incorporation documentation of the HK Company, but the strict laws of the Caymans prevented us from conducting the necessary searches. What’s a China Lawyer to do?

Interestingly a quick internet search for the Cayman Islands company online turned up USA SEC filings which the Cayman islands company reported its corporate Directors as part of required filings of beneficial ownership of a separate company publicly listed on the NYSE. This documentation revealed that the Directors between the PRC company, the Cayman’s company, and the Hong Kong company are all pretty much the same.

This kind of situation is something China Lawyers, and those doing business with Chinese companies are encountering more and more. Due to restrictions on flow of capital out of PRC, and restrictions on foreign investment in specific sectors in PRC, inventive companies are seeking alternative corporate structures to get around the restrictions. USA and European companies have been doing this for years via complex structures to maximize tax savings.

We still don’t know who the formal shareholder of that Cayman Islands company is, but I would bet it is established directly by one or more of the individuals who directly established the headquarters in Beijing. If this is true, the “headquarters” may be more like a standalone operation in PRC, while the Cayman Islands company sits a top of a complex web of international investments.

Published by Jacob Blacklock on September 18th, 2016 tagged Uncategorized | Comment now »