Legal Considerations when Doing Business in China

1. Legal Considerations when Doing Business in China Paul Lavery Tuesday 3 September 2013

2. Legal Considerations when Doing Business in China • Issues/considerations depend on manner in which you wish to do business • Are you establishing on the ground in China – e.g. establishing Chinese subsidiary, representative office or a Joint Venture with local company; or • Are you remaining established solely outside China but proposing to enter contracts with local Chinese companies (e.g. with Chinese outsource service providers, manufacturers, distributors or agents)

3. Legal Considerations when Doing Business in China • Establishing on the ground – Need to consider full array of issues from Chinese law perspective (incorporation/establishment options, employment law, contract law, tax law, local regulatory authorisations/approvals etc); • Remaining in Ireland but contracting with Chinese company – Considerations primarily relate to ensuring that agreements are binding and enforceable and clearly set out the commercial terms

4. Contracting with Chinese Companies • Outsourcing Agreements • Manufacturing Agreements • Distribution Agreements • Agency Agreements

5. Chinese Contracts • Contract serves as: • Guiding star – overriding principles for the parties’ co-operation under the contract (similar to recitals in Irish contract) • Road map – on how to proceed towards the parties agreed goals • Check list – of rights and obligations • Trouble shooting manual – dealing with situations where matters go wrong – e.g. dispute escalation and resolution in amicable way

6. Contracting with Chinese Companies • Example: Distribution Agreement with Chinese company • Chinese Company will be licensed to distribute your goods within China (and possibly manufacture those goods?) • Negotiation and agreement of commercial terms • Reflect the commercial terms in legally binding agreement • Consider how to ensure that the agreement will be valid and enforceable

7. Contracting with Chinese Company • Avoid: • Oral agreements • Agreements with no express governing law or jurisdiction • Signing • Use of blue ink better than black ink • Company stamp/seal often expected

8. Contracting with Chinese Company • Questions to Consider when contracting • Clarity of Terms (Do both parties accept the commercial terms of the deal – Are the commercial terms clearly set out?) • Consider Governing Law and Governing Jurisdiction of agreement • Chinese law or foreign law? • Chinese jurisdiction or foreign jurisdiction? • Reliance instead on mediation/arbitration? • If foreign law and jurisdiction chosen, will a judgment given in a foreign country be enforceable in China? If not, no point specifying foreign law and jurisdiction

9. Contracting with Chinese Company • Option 1: • Provide that contract is governed by Chinese law • Submit to the exclusive jurisdiction of the Chinese courts • Ensure that the contract is written in Chinese • Chinese law firm will need to advise on drafting and negotiation of contract

10. Contracting with Chinese Company • Option 2 • Specify foreign law and foreign jurisdiction • Article 126 of Contract Law of the People’s Republic of China – Recognises Choice of foreign law subject to conditions • Article 244 of Civil Procedure Law of People’s Republic of China – Recognition of Choice of Jurisdiction subject to conditions

11. Contracting with Chinese Company • Option 2 – Specify foreign law and foreign jurisdiction – • Conditions • Agreement in writing • Jurisdiction chosen has actual connection with the contract and dispute • Dispute involves contract with foreign element or foreign property rights • Contract is not contrary to basic principles of Chinese law or public interest and is not designed to evade mandatory Chinese laws and regulations • Enforceability of Foreign Judgment in China still needs to be considered

12. Contracting with Chinese Company • Enforceability of Foreign Judgment in China still needs to be considered • Generally only enforced where reciprocal treaty agreement with China for the mutual recognition and enforcement of judgments – Only a few countries have such a mutual recognition • France, Italy, Spain have mutual recognition but not Ireland or the UK

13. Contracting with Chinese Company • Option 3 – Arbitration • Provide for dispute to be referred to arbitration in a country which is party to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) • Governing law and place of arbitration should be clearly set out • Number of conditions to be satisfied which should be vetted by local counsel

14. Establishing on the Ground • Establishment will be subject to and governed by Chinese law • Consider Legal, Tax and other requirements for establishment • Appoint Chinese law firm to advise on establishment and ongoing obligations • Employment Law • Tax Law • Chinese company and contract law • Local Regulatory Approvals/Authorisations

15. Establishing on the Ground • Establishing a presence – Range of approvals required for investment projects in China from local, municipal, provincial and state authorities • Consider options for establishment in China

16. Establishing on the Ground • Consider options for establishment in China: • Local branch of foreign company - Chinese company law permits this, but is in practice only done for companies engaged in financial services or oil exploration • Representative Office – Option for those in the trade agency and service industries – restricted t0 “liaison and marketing activities” • Acquire local business - Certain restrictions are laid down by the Ministry of Finance etc on the extent to which foreign investors can hold interests in Chinese businesses.

17. Establishing on the Ground • Consider options for establishment in China: • Incorporate a new company locally – the set up of a Chinese company (classified as a WFOE – wholly foreign owned enterprise) – simplest approval process with complete management control. • WFOE: • Limited liability; • no Chinese partner required so may be owned entirely by foreign investors; • minimum capital requirements apply (for sole shareholder company – approx US$16,000); • application reviewed and approved by commerce authority in locality of proposed establishment; • up to 90 days approval process • Joint venture with local company

18. Establishing/Investing in China • Foreign Investment Industrial Guidance Catalogue (2011 Amendment) • Divides industries/sectors into “encouraged”, “permitted”, “restricted” and prohibited” categories • Examples of “Encouraged”: • Upgrading China’s manufacturing industry • Promoting foreign investment in new energy, new materials and high end equipment • Encouraging development of the service sector

19. Establishing/Investing in China • Manufacturing sector • Encouraged: - “green” garment production • Restricted: - rice and flour processing (Chinese investment must be in controlling position) • Prohibited: - Various categories of battery production

20. Establishing/Investing in China • Healthcare sector • Encouraged: - Biological vaccine production • Permitted: - Clinic construction; medicine wholesaling • Restricted: - Blood product or drug production (Chinese investment must be in controlling position)

21. Establishing/Investing in China • Modern services sector • Encouraged: - IP services • Permitted: - Commodity futures • Restricted: - Legal consulting

22. Establishing or doing business in China • Ensure you are aware of whether particular business is encouraged, permitted, restricted or prohibited • Ascertain regulatory requirements • Seek advice from Chinese law firm (either directly or via your existing lawyers in Ireland) • Remember importance of clearly drafted and enforceable written contracts

23. Legal Considerations when Doing Business in China Paul Lavery Tuesday 3 September 2013