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

3 September 2013 – Legal Considerations when doing Business in China 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 September 2013 – Legal Considerations when doing Business in China 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

3 September 2013 – Legal Considerations when doing Business in China Contracting with Chinese Companies  Outsourcing Agreements  Manufacturing Agreements  Distribution Agreements  Agency Agreements

3 September 2013 – Legal Considerations when doing Business in China 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

3 September 2013 – Legal Considerations when doing Business in China 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

3 September 2013 – Legal Considerations when doing Business in China 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

3 September 2013 – Legal Considerations when doing Business in China 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

3 September 2013 – Legal Considerations when doing Business in China 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

3 September 2013 – Legal Considerations when doing Business in China 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

3 September 2013 – Legal Considerations when doing Business in China 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

3 September 2013 – Legal Considerations when doing Business in China 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

3 September 2013 – Legal Considerations when doing Business in China 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

3 September 2013 – Legal Considerations when doing Business in China 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

3 September 2013 – Legal Considerations when doing Business in China 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

3 September 2013 – Legal Considerations when doing Business in China 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.

3 September 2013 – Legal Considerations when doing Business in China 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

3 September 2013 – Legal Considerations when doing Business in China 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

3 September 2013 – Legal Considerations when doing Business in China 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

3 September 2013 – Legal Considerations when doing Business in China 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)

3 September 2013 – Legal Considerations when doing Business in China Establishing/Investing in China  Modern services sector  Encouraged: - IP services  Permitted: - Commodity futures  Restricted: - Legal consulting

3 September 2013 – Legal Considerations when doing Business in China 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

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