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China Investment – Legal 101
for
The City of Toronto & CCBC
Structures, Contracts, IP &
Dispute Resolution
Todd Bissett – 白思涛
Partner
October 31, 2012
Overview/Agenda
1. Background
2. Corporate Structures
3. Contracts
4. IP Protection
5. Dispute Resolution
6. Summary
It’s a big (and complex) world out there…
Don’t be the 井底之蛙
Background
• Who am I and what do I do?
• Why am I here today?
• Do I mind if you interrupt me?
Corporate Structures
Corporate Structure Topics:
• Entity Types
• Industry Classifications
• Cross-Border Structures
• standard
• restricted industry
5
Types of Entities
•Chinese regulations provide 4 types of permitted
“foreign invested enterprises” (“FIEs”) • Representative Office
• Wholly Foreign Owned Enterprise
• Equity Joint Venture
• Cooperative Joint Venture
•Just a few differences vs. Canada (& elsewhere): • Registered Capital (i.e., no “shares”)
• Total Investment Amount
• Business Scope
• Formation process and ongoing supervision
• Exit problems – transfers of equity & M&A Rules
Corporate Structures
6
Industry Classification
•All industries in China are categorized as: • Prohibited – no foreign investment permitted at all, even joint
ventures and minority ownership.
• Restricted – limited FDI permitted, generally only minority and
without substantial control.
• Encouraged – 100% foreign ownership possible and encouraged
through incentives.
• Permitted – 100% foreign ownership possible but no special
incentives. This is the catch-all category.
Corporate Structures
7
Offshore Structures
•Most Foreigners Use
Offshore HoldCos.
Why? • PRC Transfer Restrictions
• Tax Advantages
• Exit Flexibility
• Compartmentalize
Liabilities
•Here is a typical
preferred structure:
Offshore SPV
Offshore
China
WFOE/JV
Parent Company
Corporate Structures
8
Offshore SPV Offshore
China
WFOE/JV Domestic
OpCo
Nominee
Restricted Industries – Captive Company Structure •Foreign investor invests in an onshore WFOE/JV through a typical SPV; but the WFOE/JV does not operate the business (no Business License).
•Instead, a domestic PRC company is formed to obtain the license and operate the business.
•The PRC company is controlled, not owned, by the WFOE/JV – uses contractual arrangements (the dotted lines below).
Corporate Structures
Contracts
Contracts Topics:
• First Principles
• PRC Contract Law & Drafting
• Cultural Differences
Contracts
First Principles:
• Nature & Jurisdiction of Parties
• Are counterparties domestic PRC entities or foreign-
invested enterprises (“FIEs”)?
• Are you contracting through your own PRC entity or
directly from offshore?
• Characteristic of Business Arrangement
• Deals have personalities – what is yours’?
• Current Legal & Regulatory Environment
• Consider general & specific constraints
• Constantly changing
Contracts
PRC Contract Law & Drafting:
• General principles will be familiar, though with variations
• No consideration required for a binding contract
• “Public Interest” exceptions
• “Ancillary” terms become key
• Language
• Governing Law & Dispute Resolution
• Limitations on Liability
• Specific Performance
Contracts
Cultural Differences:
• Guanxi
• Contract Drafting/Ambiguity
• Negotiation Style
• Post-Deal Negotiation
• Chinese Names Challenge (老百姓)
Intellectual Property Protection
IP Protection Topics:
• Legal Regime & Implications
• Recommendations
Intellectual Property Protection
PRC Legal Regime & Implications:
• First-class laws & regulations
• China is party to all primary international IP treaties
• And under PRC law int’l treaties take precedence
• Specialized courts & governmental agencies
• Registration, licensing, int’l best practices now common
• Corruption generally not a problem
• Enforcement options (Courts, Gov’t, Criminal, Customs)
BUT…
Enormous Volume!!!
Intellectual Property Protection
Recommendations:
• Register IP before entering the Chinese market
• China is a first-to-file jurisdiction
• Establish systems & procedures to physically protect IP:
• Literally lock down IP
• Limit employee access
• Maximize protection for easily replicable IP
• Build business plan around assumption of infringement
• Guanxi
Dispute Resolution
Dispute Resolution Topics:
• Legal Systems: Important Canada/U.S. vs. China Differences
• Primary Choices to Make
• Primary Factors Influencing Choices
• Common Examples
Dispute Resolution
Important Systemic Differences:
• Common Law vs. Civil Law
• Language
• Depth & Consistency of Professionals
• Corruption & Political Influence
• just kidding!
Predictability
matters.
Dispute Resolution
Three Primary Choices:
• Chinese Governing Law; or
• Non-Chinese Governing Law
• Litigation; or
• Arbitration
• Resolution in China; or
• Resolution outside of China
As long as a dispute has
at least one non-Chinese
party, all of these options
are on the table.
Dispute Resolution
Three Primary Factors:
• Enforceability
• non-PRC court awards
• Remedies
• non-$ arbitral awards
• Cost & Convenience
• absolute & relative terms
Bonus Factor
(and often the decider):
What your
counterparty
will accept.
Dispute Resolution
Most Common Examples:
• Hong Kong Arbitration & New York Law
• Other jurisdictions: Singapore; Tokyo; Hawaii
• PRC or other laws possible
• CIETAC Arbitration & PRC Law
• NY or other law is possible
• PRC Courts & PRC Law
• Hybrid Structures
