China In-House Monster

PE Funds Come Hither To the Juciest of Markets

2011-06-16T20:20:00.000-07:00

Some say the grass is greener on the other side. Here in China it very well may be for foreign private equity investors. While the banker wankers on the other side of the world have sent the global economy into chaos, China still remains a liquid and robus market and domestic private equity competition is HOT.

Where does this liquidity come from?

Huge RMB and foreign capital reserves.

High Net-Worth Individuals.

National Social Security Fund.

Chinese Banks.

State-Owned Enterprises.

Insurance Companies.

How were foreign PE firms operating in China in the past?

Historically Chinese regulators had little expirience with Financial Investors and corporate laws failed to accomodate or even address their needs. Foreign private equity investors have had a long history of PE investment in China. However because the laws were in the nascent stage and Chinese regulators turned a blind eye, these foreign PE investors usually held their China based investments via offshore holding companies in jurisdictions such as Hong Kong, Cayman, BVI - documenting shareholder arrangements at the offshore level.

You see, in China governement approvals are required for transaction related documents. Under the old model of investing in China, foreign investors could still enjoy investor protections such as call and put options, preferred sahres, rights of first refusal, etc. without having to first gain Chinese government approval (Noting that the PRC government still to this day is not entirely comfortable with the concept of preferred shareholder rights).

There was also another advantage of this model. Foreign investors could enter industries that were otherwise restricted to foreign investment through contractual arrangements with a domestic Chinese entity. Because the Chinese entity would be owned by a Chinese national, it would be able to secure business licenses for sectors in which foreign investment is prohibited. The 10% capital gains tax in China was also avoided. This was all fun and games until the Chinese economy became healthy and the government no longer needed all this foreign hot money comming in.

Round-Trip Investments Prohibited.

In the mid 2000s is when the tables turned. The M&A rules and SAFE Circular 75 made approval of round-trip investments extremely difficult to achieve.

In China the flow of currency is strictly regulated by the State Administration of Foreign Exchange "SAFE". SAFE Circular 142 for example places restriction on the inflow of foreign capital. Unless the word "investment" is in the business scope of an operating entity - Circular 142 pprohibits entities from converting foreign currency into RMB for the purpose of onshore equity investment. The issue is that getting the word "investment" approved is quite difficult.

Never Fear New Laws are Here!
In the next post I will give you a sneak peak into the FIVCIE Model, FILP Model and EIF Model, which are the newest ONSHORE investment models available to foreign equity investors in China. And a taste of the latest local laws and incentives.

China's Impending Health Issues - How Can Smartphones Help?

2010-03-29T20:24:00.000-07:00

What are Chinese citizens most concerned about?

Medical issues generally fall under the number one category of concern among Chinese citizens according to government surveys - trailing much higher than concerns over social morals, security, education and unemployment. Much of this anxiety comes from the fact that routine healthcare is still extremely expensive even for the average Chinese middle class - not to mention that hospitals revenues and pharmaceutical sales are in a market oriented system which further increases medical expenses.

[See my previous post on drug pricing http://chinainhousemonster.blogspot.com/search/label/drug%20pricing]

How have eating habits changed in China?

Historically, Chinese diets have had a symbolic relationship between the food eaten and aspects of health. "He that takes medicine and neglects diet, wastes the skills of the physician."(Chinese proverb)" It is important to point out cultural values here. One one side Chinese people are very concerned about balance and harmony, the "yin and the yang", or the "five elements theory" that was traditionally applied to almost every aspect of day to day life, including food. However, today with rising disposable incomes and most of the nuclear family in the workforce, regular eating out has become mainstream culture in China. This is why fast food chains such as McDonald's and KFC have been some of the fastest growing franchieses in this region.

Beacause of this change in eating habits and lessened physical activity, Chinese people are increasingly starting to witness diet and obesity related health disorders. According to a Chinese health ministry statement in China there are more than 60 million obese people and another 200 million who are overweight. The New England Journal of Medicine calls diabetes and pre-diabetes a silent epedemic in China - with 1 in 10 people already suffering from the disease and millions who are undiagnosed.

How smartphone apps work toward promotion of health in other countries?

There currently exist about 700 healthcare and fitness smartphone apps ranging from the useful to the gimmicky. These include custom diaries, calorie counters (tracking what you eat, including those from popular foods or restaurants), pedometers (tracking your every footstep) etc. Users pay about 99 cents for these applications or sometimes even get them for free. Although you can't click yourself to a healthier body, many users have claimed that by using things such as a calory counter, they think twice before consuming certain foods. Also since the price of these apps are so low, there is more of a "why not try" attitude and very little required commitment of the consumer with respect to expense and time.

Smartphone applications for food in China

China with 800+ million cellphone subscribers is easily the worlds largest growing market for smartphones and smartphone apps. The major service providers such as China Mobile, China Unicom, and China Telecom have already outfitted third generation devices. Given the discussion above, there are really endless ways smartphone apps in Chinese can be used for improving/maintaining the health of Chinese citizens, by educating the consumers and providing instant information on food choices. There are hundreds if not thousands of franchisee food stores in China - wouldn't it be great if when you walked in you could see the calorie and nutrition count of everything on the menu. What about all the snack foods and drinks in the convenient stores which are on every corner and every block... With the relatively low cost of the application, consumers can benefit with little expenditure by taking proactive rather than reactive measures on health. Because medical issues are most important to Chinese people, apps tailored to these concerns will surely fare well.

Interesting Reading

Food and Eating Anthropology: http://www.sirc.org/publik/food_and_eating_9.html

New England Journal of Medicine: http://content.nejm.org/cgi/content/short/362/12/1090

Five Elements Theory of Chinese Cooking: http://chinesefood.about.com/library/weekly/aa041900a.htm

China Suffering Diabetes Epedemic: http://health.yahoo.com/news/afp/chinahealthdiabetes_20100325104234.html

Smart Solution: Researchers Use Smartphones to Improve Health of Elderly Diabetics in China:

http://www.sciencedaily.com/releases/2009/10/091029162022.htm

Google to Pull out of China?! For Human Rights Reasons?

2010-01-12T18:49:00.000-08:00

If you've already read the news this morning, you would have heard that 'Google citing a cyber attack' is threatening to pull out of China.

Read the article on NY Times here:
http://www.nytimes.com/2010/01/13/world/asia/13beijing.html

Read the official Google Blog statement here:
http://googleblog.blogspot.com/2010/01/new-approach-to-china.html

What is most interesting to me, is that Google is attempting to put a 'human rights' spin citing that the recent attacks:

'presented a challenge to the company’s guiding zeitgeist, “Don’t be evil.”' and that... 'The company said it would try to work out an arrangement with the Chinese government to provide an uncensored Internet — a tall order in a country that heavily filters the Web — but that it would close its offices in China if its demands were not met.' (NY Times)

The comments on the NY Times and those from human rights activists further applaud and challenge Google to take this step, in the name of human rights. But I think readers overseas who have not spent a considerable amount of time in China, or learning about China, including diplomacy, political agendas, etc. have clearly missed the point. And lets face it, not many countries have a clear conscience when it comes to human rights. Our own American companies are doing some very questionable things when in China and around the world. And continuing to point fingers neither has or neither will ever be effective.

As for Google, what exactly is happening to their China operations fiscally speaking? And is this the real impetus for their threat to pulling out? Are there protectionism issues from the Chinese side? (of course!). I think a more wholesome discussion is required rather than pinning this whole issue to human rights.

Lastly, I am not going to discuss China's human rights issues, or how far they have come or digressed. The important issue is looking at the NOW- and how can we work with the governments of nations around the world, through education, dialogue, etc. instead of rubbing against the grain. An organization that comes to mind that has really understood this concept is International Bridges to Justice (http://ibj.org/).

Anyway, I am interested to see how this PR stunt will unfold and invite any comments.

PRC Tort Liability Law Comming to Save the Environment

2009-12-23T23:57:00.000-08:00

The National People's congress is still working on the draft of the PRC Tort Liability Law - which is an essential law that should be introduced to China's Civil Code. Currently tort related provisions are found in laws such as (1) the PRC Civil Law, (2) the PRC Law on Protection of Consumer Rights and Interests, (3) the Environmental Protection Law, etc., but there is no unified set of rules yet.

The draft law is similar in sense to Western tort legislation in that it outlines rules for fault and non-fault tort liabilities. The draft is quite comprehensive and covers issues regarding medical torts, accidents, product liability, environment, etc.

There is a special section titled "Environmental Tort Liability" which is an especially important piece of legislation at this time.

The draft states that Persons who pollute the environment and cause damage shall bear tort liability. This is a major change from previous environmental tort provisions under PRC law, because under existing legislation persons bear liability if they violate environmental laws/regulations, and if such laws were not violated then the person would be exempt from tort liability. The scope of liability under the draft law has been considerably broadened. That means that even people complying with environmental laws could be held liable if they do pollute and damage the environment! Good news.

Burden of Proof rests on the person suspected of pollution in proving their is no causal link between their actions and the damages. Furthermore if more than one person/party is involved, then comparative fault will be used looking at the type of pollutants and the amount involved.

The draft also creates joint liability between creators of pollution and third parties who actually cause the damage. This is a signal for corporations not only to clean up their acts, but also to better manage and oversea third parties who are in charge of clean up and disposal, or otherwise face serious consequences.

It is nice to see the Chinese legislatures handling the matter of environmental pollution seriously. What remains to be seen is how much of a deterrent effect the actual penalties will have...

The PRC Contract Law - (Part 3) As deep as it gets.

2009-11-30T21:46:00.000-08:00

Below are some practical constraints and best practices with respect to the PRC Contract Law. Although quite general, some of the issues below also apply to many other transactions under PRC law.

IIII. Practical Constraints

• China does not follow a system of judicial precedent, and without a case law system it can be difficult to resolve complex contract issues. **(However judicial interpretations by the PRC Supreme Court are binding.)

• There is no formal system of discovery in China, therefore gathering and compelling evidence can sometimes be mission impossible.

• Judgements in PRC courts are often political and protectionist.

• In many cases, the laws that apply to a particular contract case can be found in many different places, often with no translations, and these laws regularly are in conflict.

IIV. Best Practices
• At the drafting stage it is important to gather as much information from the local party as possible.

• Independent legal advice from local Mandarin speaking lawyers is advisable if you do not have relevant expertise in a particular area.

• In the event of a dispute, arguments should be based on the legal framework and the principles of the law, rather than its application through cases.

• When conflicts between PRC laws exist, it is prudent to follow the law or regulation issued by the higher decision making body.

Help, what is my severance pay?

2009-11-29T23:37:00.000-08:00

If you are entitled to severance pay, how exactly is it calculated in the PRC?

In the PRC, severance pay is calculated in a bifurcated manner. The old labor law (“Old Law”) applies to the term of employment before January 1, 2008 and the new PRC Labor Contract Law (“New Law”) applies to the period from January 1, 2008.

1. For term of service after January 1, 2008.
According to the New Law, severance pay is generally 1 month’s salary for each year of employment (or ½ month salary for employment of less than 6 months).

“Monthly Salary” = the employee's average monthly salary in the preceding 12 months prior to termination, which includes base salary and also any bonuses, allowances, subsidies, etc.

**If however, the Monthly Salary is more than three times the average monthly salary of all employees in the jurisdiction (“Average Local Salary”), then the Monthly Salary will be capped at 3x the Average Local Salary. For example in Shanghai the Average Local Salary in 2008 was RMB 3,292, and three times that equals RMB 9,876. Therefore, suppose your monthly salary is RMB 35,967 a month from January 1, 2008 – January 1, 2009, your severance will be capped at RMB 9,876.

2. For term of service before January 1, 2008.
According to the Old Law, the term of employment before this time period is not subject to the Average Local Salary cap. Therefore, employees fair much better with regards to severance pay for the term worked prior to January 1, 2008. So following the example above, you will be able to use your Monthly Salary (i.e., RMB 35,967) to calculate severance pay.

(***this is not legal advice! talk to a friendly lawyer friend -- you may also be able to get more or nothing at all, depending on your individual circumstances)

Deeper into the PRC Contract Law (Part 2)

2009-11-29T22:39:00.000-08:00

II. Formation of contracts under PRC law

Structurally, the Contract Law, like many other laws on contracts, is divided into three sections:

(1) General Provisions;
(2) Specific Provisions; and
(3) Supplementary Provisions.

In the Contract Law, there are many black letter provisions that are common to contract laws in other jurisdictions. But there are also certain provisions that may come as a surprise to foreign practitioners which will be discussed in more detail below.

 In Writing means a memorandum of contract, letter or electronic message (including telegram, telex, facsimile, electronic data exchange and e-mail), etc. which is capable of expressing its contents in a tangible form -- ***therefore an email may be considered a proof of writing and be used to conclude a contract.

 Choice of Law - In contracts with a foreign element, the parties may choose the law for dispute settlement. In the absence of a stated law, the law of the jurisdiction with the closest connection to the contract will apply.

****Notable Exceptions: PRC law applies in specific cases such as: (1) Sino-foreign cooperative joint venture contracts; (2) Sino-foreign equity joint venture contracts.

III. Recent clarifications on the Contract Law

(i) Second Judicial Interpretation and the Recent Judicial Direction on Contracts

24 April 2009 the Supreme People's Court (the "SPC") issued a second judicial interpretation re "Interpretation on Several Issues Concerning the Application of the PRC Contract Law" (the “New Interpretation”);and on 7 July 2009 the Supreme People’s court issued the Direction on Dealing with Several Issues in Civil and Commercial Contract Disputes (“Direction”), for more guidance on how lower PRC courts should apply the Contract Law.

 Highlights include:

 Introduction of a “Change of Circumstances” rule - According to Article 26, of the New Interpretation, where a change of circumstances has occurred due to various reasons enumerated in the Article such as, material objective changes, unforeseen circumstances, or unfairness, etc., the party affected may apply to the court for amendment or termination of the contract. **It should be noted that courts will proceed with this issue with caution in order to maintain fairness and not overly hinder freedom of the market economy.

 Liability for failure to carry out formalities to effectuate a contract – such as failure to complete government registrations, etc., can subject the offending party to relevant expenses. For foreign parties who often depend on the Chinese party to the transaction to complete government registrations/filings/approvals, etc., this may be a valuable tool - however in practice I can't imagine negotiations would go very well if this rule was sprung up on the Chinese party. But at least we know its there.

 Liquidated damages may be adjusted by the courts to the actual losses suffered by the party – but in no event shall be more than 30% of the actual losses suffered by the party. **The principals here are fairness and good faith.

 Standard Form Contracts and Exemption of Liability Clauses– here the contract provider must use reasonable efforts to draw attention of the other party to clauses in which it attempts to limit its liability. **Reasonableness will be based on, among others, font size, typeface, and other sufficient markings. Failure to do so, may allow the court to rescind the contract.

 Fingerprints may be recognized as fulfilling the requirement of “signing” or “sealing” the contract.

 Place of Signing may be determined according to the place agreed by the parties, even if it is not actually signed there, or if it is signed in different places or no location is specified, the final signing place will be recognized.

 In absence of a writing or oral agreement, actions by parties may be sufficient to conclude a contract unless laws or regulations otherwise provide.

 If a contractually named principal begins performance of a contract but has no power of agency in the contract, the contract will nevertheless stand effective.

The New Interpretation, still remains quite general in parts, but should nevertheless provide more guidance to contracting parties and in some respects reinforces the Supreme People’s Court’s desire to allow the free will of contracting.

That's all for now visit again for an even deeeper look... (and remember this is for reference only and not legal advice)

Deep into the PRC Contract Law (Part 1)

2009-11-25T22:59:00.000-08:00

This is an important area of law to understand for all parties doing business in the PRC.

I. Legislative Overview

(i) Background

• As a trading nation which functioned under a strictly planned economy, China had no need to have an established system of law for centuries. However, with the opening of the PRC and the altering of trade culture, the legislature quickly realized a need for laws on contracts to provide structure and guidance to the mounting complications arising in trade related transactions.

• Prompted by such circumstances, the National People’s Congress, passed the following three laws on contracts in the early 1980’s:

1 Economic Contracts Law of the PRC (1981);
2 Law of the PRC on Economic Contracts Involving Foreign Interests; and
3 Law of the PRC on Technology Contracts.

These three-piece laws on contract were largely inconsistent and overlapped in many areas while offering little guidance for complex contractual cases. The purpose of the second law on the list was to promote foreign trade and investment, and for the first time in PRC history incorporated Western notions of freedom to contract and party autonomy.

(ii) Promulgation of one uniform contract law in 1999

Initiated by further globalization in the 90's, the State Council undertook a major overhaul to further reform this area of law – which resulted in the promulgation of the ‘PRC Contract Law’ (1999) (the “Contract Law”) - which repealed the former three laws – and was an overt effort by the government toward "protecting the legitimate rights and interests of parties to contracts, maintaining socio-economic order and promoting socialist modernization”.

 The Contract Law is a hybrid of key concepts from Common Law and Civil law jurisdictions.

 The Contract Law is not comprehensive in itself, and other laws which must be referenced include:

a. PRC Civil Code;
b. PRC Supreme Court interpretations and administrative regulations;
c. District level, city level, provincial level and national level rules, ordinances, guidelines, etc.; and
d. Specific laws such as, PRC Law on Chinese-Foreign Equity Joint Ventures (2001).

(iii) Legislative developments of the PRC Contract Law

 PRC Contract Law (effective October 1, 1999)

 Interpretation of Issues relating to the PRC Contract Law (Supreme Court, effective December 29, 1999)

 Interpretation of Issues relating to Construction Contracts (Supreme Court, 2005)

 Interpretation on Several Issues Concerning the Application of the PRC Contract Law (Supreme Court, April 24, 2009)

 Direction on Dealing with Several Issues in Civil and Commercial Contract Disputes (July 7th, 2009)

Come back next week for a closer look!

Complying with the FCPA in China

2009-10-21T19:11:00.000-07:00

What is the FCPA and why should you be concerned?

The US Foreign Corrupt Practices Act – governs the offering of bribes to foreign government officials to further business interests. China, which shouldn't come as a surprise, falls under the catagory of high risk jurisdictions. Even though the act of gift giving is customary in Chinese culture and business transactions, the giving of certain gifts will run afoul of the FCPA. The US Department of Justice and the Securities Exchange Commission have been stepping up their investigation and punishment of FCPA violations. "If we call them before they call us, it's not where they want to be." (DOJ spokesperson).

Who does it apply to?

(a) Issuers of public securities or those required to regularly report to the SEC, even PRC companies listed in the US.

(b) US citizens, US permanent residents (i.e., green card holders)

(c) Business entitites established in the US or those with a principal place of business in the US (and their senior officers, directors, shareholders or employees)

(d) Foreign businesses or nationals (that cause an indirect or direct corrupt payment in a US territory)

(e)Foreign Subsidiaries of US companies (US companies will be held liable if they authorize, direct or approve of noncompliant activity by their subsidiaries, this also includes situations where they were not actually aware but should have known)

Elements

(1) Giving or Offering
• includes an offer, a promise to pay or payment of anything of value

(2) Anything of Value
• the giving of anything of value includes particularly creative means beyond the obvious exchange of money such as: low interest loans, assistance to get jobs or into educational institutions, credit cards, gym memberships, payment for weddings, holidays etc., and even nonmonetary gifts such as sexual favors, etc. Just use your imagination.

(3) To a “Foreign Official”
• in China this includes: a member/candidate/official of a political party, any officer or employee of the PRC government, a public international organization, or any department, agency thereof, or any person that acts in an official capacity, and also includes employees of State-owned enterprises.

(4) Directly or Indirectly

Means also giving something of value to any person - while knowing that such thing of value will be Given or Offered to a Foreign Official. Knowing includes not only actual awareness or a firm belief, but also a high probabilty that such circumstance will occur or that it exists. Concious disregard is not a defence.

(5) With a Corrupt Intent
• i.e., for the purpose of influencing the Foreign Official in the furtherance of an act or decision in their official capacity or inducing a Foreign Official to use their influence over a foreign government or instrumentality in order to affect its acts or decisions.

(5) To Further Business Objectives

What is allowed under the FCPA?
The FCPA does allow payments to Foriegn Officials for the purpose of performance or expediting a routine government action, examples of which include: obtaining permits, licenses, police protection, utilities supply, etc. The focus here is ROUTINE - and means actions that are commonly or ordinarly performed by such Foreign Official. And small nominal gifts are ok too (ask your lawyer what is ok)

Penalties
The penalties for FCPA violations are very very high. And include criminal fines of ($2 million for corporations, and $100k for individuals with a possibility of 5 years prison sentences) and civil fines of $10k for corporations or individuals, not to mention companies run the risk of loosing important licenses, permits or qualifications for continuing their business operations.
See WSJ Article - http://tinyurl.com/r2urug

Final words - do your due dilligence - the DOJ, SEC or your coroporate board will never critisize you for doing tooo much DD.

Check out FCPA BLOG - for all the naughty news - http://fcpablog.blogspot.com/
**this is not legal advice

Can I Map or Can't I Map in China? That is the Question

2009-10-14T00:21:00.000-07:00

Chinese law places quite stringent restrictions on the production and distribution of maps in the PRC.

Surveying and Mapping is defined as, “activities conducted to determine, collect and formulate the key elements of physical geography or the shapes, sizes, space positions, attributes, etc. of man-made surface installations, as well as to process and provide the data, information and results gained therefrom” . And such restrictions apply to any land, air, or water controlled by the People’s Republic of China (including Hong Kong, Macau and Taiwan).

If foreign companies wish to engage in Surveying and Mapping, they must:

(1) be a Sino-foreign joint venture – with no more than 49% foreign investment;

(2) obtain a qualification certificate from the State Bureau of Surveying and Mapping; and

(3) only engage in the following permitted activities:
 Photogrammetry and remote sensing;
 Engineering surveying;
 Cadastral surveying and mapping;
 Estate surveying and mapping;
 Geographic information system engineering; and
 Internet map services.

(4) refrain from these Prohibited activities:
 Geodesic surveying;
 Aerial photography for surveying and mapping;
 Administrative boundary surveying and mapping;
 Marine surveying and mapping;
 Compilation of topographic maps or general maps; and
 Compilation of electronic maps for navigation (such as for GPS systems in cars).

***Only maps that have been reviewed approved by the State Bureau of Surveying and Mapping may then be distributed or otherwise be displayed publicly in the PRC.

***publication of other types of maps such as those on the internet may also be subject to other permit requirements.

[this is not legal advice]

http://en.sbsm.gov.cn/article//LawsandRules/Laws/200710/20071000003241.shtml
http://en.sbsm.gov.cn/
Interim Measures for the Administration of the Surveying and Mapping Conducted by Foreign Organizations or Individuals in China (2007).

When I Was in Nam

2009-10-12T20:43:00.000-07:00

Fisherman village - a never ending pier - Phu Quoc

The constant buzz in Siagon

Floating past a typical house in the Mekong Delta region of Vietnam - near Ben Tre

Mekong river

Sao Beach - Phu Quoc

Relaxing in Siagon

War Remnants Museum - Siagon

Ben Tre - Mekong Delta

Some tips for Southern Vietnam:

Getting There: Shanghai Airlines - night flight to Siagon (Vinah Sun Taxi is very reliable - should cost about 100k - 130k dong into the city)

Must See:
- Phu Quoc Island (Vietnam Airlines - very cheap RMB 500RT - can book online)

We stayed at Beach Club (http://www.beachclubvietnam.com/) - Has mouth watering food (try their coconut shrimp curry and coconut milkshakes) and great staff. You can rent moto-bikes ($7 a day) and explore the island. Be careful on the paved roads on the east side which are quite narrow, I almost got hit by a car. But most roads (such as the dirt road south of Beach Club) are fine! There is a night fish market where you can enjoy delicious bbq seafood. Phu Quoc is a very relaxed and chill place, the people of the island go out of their way to help you. Check out Sao Beach - my favorite on the island. And the waterfalls. The fishing village near the Phu Quoc airport is nice too. The other fishing villages are smelly and not too interesting. And don't forget to take home some Phu Quoc pepper/salt/garlic mix. The beautiful island dog you will see them everywhere.

We spent 2 days in Siagon at Hotel Elois which has a very nice buffet breakfast - it is located in the back packer area - try and haggle for the room price - I am sure we overpaid - but it was very clean and safe. From Siagnon you can do a Mekong Tour (with Sinh Cafe $7). I opted for the 1 day tour of Ben Tre and it was an overall pleasant experience, with visits to coconut plantations and a plethora of boat rides. The longer tours sounded a bit boring and I heard from a friend that the hotels are very very basic and not that clean.

In Siagon definatly go to the Rex Hotel in the evening for a very overpriced coctail. The atmosphere is right out of an old film and there is a great band. And spend the day at the Botanical Gardens.

Eating in Siagon: Pho 24. Ngo Restaurant - Its very famous... i forget the full name of it, and my favorite "Wrap and Roll" it was amazing!

Shanghai Summo

2009-10-11T23:31:00.000-07:00

Check out this funny video done by a friend of mine.

Just in time for Halloween!!

Photovoltaic Industry - Prospects for Foreign Investment in China (Part 2)

2009-10-11T19:40:00.000-07:00

• Technology Transfer
Because foreign-invested solar projects fall under the category of Encouraged Industries in the Catalogue, imports of certain essential components or equipment for the operation of such business in the PRC are entitled to preferential treatment including tariff exemptions.

• Manufacturing/Distribution/Sales
For foreign investors that already have a manufacturing base in the PRC, the rules are fairly straight forward with respect to sales of domestically produced solar products to customers within China, and once a manufacturing facility is duly established, generally, there are fewer legal hurdles with respect to special certifications or standards on the distribution and sales of such goods. It is important to note however that the use of certain chemicals (such as those classified as “dangerous chemicals in the Catalogue of Dangerous Goods) in the manufacturing process may subject the manufacturer to certain production license requirements and permits.

• Research & Development Centers
Foreign investment through R&D centers is encouraged by the Catalogue and allows for cost control through the shared use of resources and expenses in one of China’s many established high-technology parks. Examination and approval authority rests with the provincial-level Ministry of Finance offices. Once approved, the foreign invested R&D center may import technology and equipment with reduced duty and VAT (except for those items listed in the Catalogue of Imported Goods Not Exempt from Taxation for Foreign Investment Projects). Furthermore, commercialised technology that has been developed in a R&D operation will not be subject to business tax on any revenues generated from the license of such technologies (but are still subject to State and local income tax, see Part C below).

• Construction Projects
The PRC government does offer subsidies to construction projects that use certain solar technologies at RMB 20/Wp – which may be applied for by the developer or supplier of the products.

B. Foreign Investment in China’s Green Energy Sector Through Off-Shore Companies

• Importation/Distribution/Sales
Foreign imports must fall under the category of permitted goods which can be imported into China. As mentioned above, importation and use of certain products such as dangerous chemicals may be subject to special certificates or licenses. The tarrif rates on imported solar technology vary according to the nature of the imported good and the status of the purchaser. Purchasers are subject to the List of Imported Goods for Domestic Projects Not Entitled to Tarrif Exemption (effective December 15th, 2008) and List of Imported Goods for Domestic Projects Entitled to Tariff Exemption.

• Design and Engineering Services
If the foreign investor will supply its products and render related engineering and design services it will be subject to (i) bidding requirements on green energy projects, and (ii) other specific requirements depending on the project, such as price restrictions or in some cases preference for domestic products/companies. To provide design and engineering services in its own name the foreign investor must obtain a ‘qualification certificate’ – which requires, among others, a presence in China. Otherwise such investor is required to either partner with a qualified local company which will vouch for the work, or otherwise provide only limited services for a project.

C. PRC Tax Benefits for Foreign Investments in Green Energy
Foreign investors of the Catalogue’s approved green industries will be eligible for general tax benefits available to all such foreign investors in China regardless of the industry in which they operate - such as lower enterprise income tax rates for the first 3 years of operation (i.e., 15%, down from the standard 25%) for High and New Technology enterprises . More specific tax benefits will depend on where the project is located and which type of green industry is involved. For example certain types of Clean Development Mechanism or energy conservation projects are also eligible for ‘tax holidays’ or 3 years with exemption and 3 years with 50% reductions on enterprise income tax. Value-added tax (VAT) exemptions and refunds are also areas where investors can receive significant benefits.

IV. Conclusion
It is evident that ROIs on solar projects can be achieved. Thus far, China has been the largest solar panel producer in the world -but approximately 95% of finished products are exported. However, because of the credit crisis world demand has gone down for solar products so now the Chinese government is trying to stimulate the domestic market and has already been implementing solar rooftop initiatives in villages in the sunshine regions of "Tibet, Mongolia, etc." which makes for an attractive mainland market.

Photovoltaic Industry - Prospects for Foreign Investment in China (Part 1)

2009-09-09T21:17:00.000-07:00

Prompted by sheer excitement from the recent release of the China Green Tech Report 2009 (see link below) -- I will present a discussion (not legal advice) regarding foreign investment in China's Photovoltaic Industry (i.e. Solar Power!)

I. Introduction

Forced by economic and environmental pressures, China, the second largest consumer of coal in the world, has taken an aggressive and proactive stance to encourage sustainable development through foreign investment in green technology. In the industry, the term commonly coined as “green energy” may also be referred to as low carbon, clean or renewable energy – and refers to alternative energy sources such as wind, solar, geothermal, biomass, hydro power, or magnetic energy; which enables the generation of energy such that “it is environmentally friendly and is created and used in a way that conserves natural resources and the environment” . “By 2020, the Chinese government is committed to raising the share of ¬renewable energy ¬ (excluding hydroelectric power) in the energy mix to 6%, from the current 1.5%”.

Until now, affordable technologies have been beyond the reach of China which is home to 16 of the world’s most polluted cities. However, amidst the rapid environmental degradation that is the unfortunate consequence of China’s economic prowess, the market potential for foreign investment in the green energy sector is unlimited. For example, in May of this year, central PRC authorities pledged to invest more than RMB 2 trillion in renewable energy sources, as part of the new energy industry stimulus plan.

Momentum and interest for investment has been high due to the Chinese government’s proactive role in promoting ‘green deals’ and its increased scrutiny over highly polluting industries. Despite this, foreign investors focused on ROIs are concerned that maintaining positive margins in green investments may be challenging because of the existing cheap availability of non-renewable energy and further competition from State-owned enterprises which are already better financially positioned by government subsidies and the control of down stream uses of energy.

In addressing such concerns, this article focuses on “solar energy” and gives an overview of China’s regulatory environment and highlights some of the alternatives for market entry through foreign investment.

II. The Regulatory Environment

The PRC government has set out its general policies with respect to the development and application of green technology in the Renewable Energy Law (effective January 1, 2006), which delegates responsibility to the National Development and Reform Commission and the State Council to oversee development of this industry.

The Industrial Guidance Catalogue for Foreign Investment (amended December, 2007) (“the Catalogue”) sets out rules with respect to which industries are encouraged, restricted, or entirely prohibited for foreign investment and specifically encourages foreign investment in renewable energy R&D, green energy production, etc. The Renewable Energy Industry Development Guidance Catalogue further elaborates on the government’s support of ancillary activities related to the production of green energy - such as design and manufacturing, as well as providing a framework of rules on system support, equipment, materials and components.

Other notable laws and regulations will be discussed more specifically in Section III below.

III. Investment Alternatives

In looking at the various methods for market entry into China’s solar energy sector through foreign investment, it is prudent to divide the discussion into (a) foreign investors who already have a legal presence in China for example through wholly-owned foreign enterprises or Sino-foreign joint ventures (“On-shore Company”) and (b) foreign investors who have no existing legal presence in China (“Off-shore Company”).

A. Foreign Investment in China’s Green Energy Sector Through On-Shore Companies

In the PRC, foreign investment in the green energy sector through On-shore companies requires not only adherence to the general rules regarding foreign investment in China (e.g., PRC Sino-foreign Equity Joint Venture Law) but depending on the type of business also special rules, such as those applicable to foreign investment in the power supply sector (e.g., Regulations Regarding Foreign Investment in Power Supply Projects) in addition to other rules promulgated at the national, ministerial and local levels.

[The juicy details to be provided in Part 2.....]

- For now you can check out this article by WSJ http://online.wsj.com/article/SB125256399493998709.html

- and here is the China Green Tech Report 2009 http://www.china-greentech.com/report

Illegal Withdrawal of Foreign Investments from China - Cross-border Remedies

2009-08-11T20:27:00.000-07:00

Chinese authorities issued the Working Guidelines regarding Cross-border Pursuit of Liability and Initiation of Legal Action in Connection with Illegal Withdrawal of Foreign Investments from China (the “Guidelines"), effective from November 19th, 2008. Judicial assistance treaties already signed between China and foreign nations grant overseas courts jurisdiction over matters of civil or criminal actions committed in violation of PRC laws. The Guidelines, which further elaborate on these treaties, could become a powerful tool in enhancing corporate accountability and will make one think twice before making a run for the border.

What Actions Garner Liability?
Abnormal/premature withdrawal of foreign capital includes:
§ Tax evasion of a considerable sum (the Guidelines do not specify an amount);
§ Failure to complete liquidation procedures with creditors resulting in damages; or
§ Others specified by law.

Who May be Held Accountable?
According to the PRC Company Law, the following parties will be held jointly and severally liable for the above violations:
§ Shareholders of limited liability companies;
§ Controlling shareholders and directors of joint stock companies; and
§ The foreign enterprise or individual that is in ‘actual control’ whether through investment, agreement or other arrangements with the company (e.g., parent company).

How is a Judgement Enforced?
(i) Aggrieved Chinese party registers offence with relevant local judicial authorities.

(ii) After the Chinese party wins in a Chinese court, if the foreign party defendant has no enforceable property in China, the Chinese party may request that foreign courts with jurisdiction where the defendant’s property and assets are located to acknowledge and enforce the judgements.

(iii) Chinese authorities, in accordance with the treaties, may contact foreign authorities for assistance regarding matters such as: service of judicial documents, obtaining evidence, investigation of personnel and capital/funds, search and seizure of property.

(iv) In Civil suits, Chinese nationals are afforded the same rights as nationals of the overseas jurisdictions where judgement is sought. Further, those suffering financial hardship may also apply for legal aid according to the laws of the country where they file suit.

(v) China has extradition treaties for serious cases involving malicious tax evasion.

Moganshan Mountain

2009-07-22T23:54:00.000-07:00

Temperatures in Shanghai can get extremely uncomfortable during the summer months. If you are tiered of feeling like a roast potato in the middle of the city, I highly recommend a long weekend stay at the Naked Retreats (http://www.nakedretreats.cn/) on Moganshan Mountain. During our stay we were blessed to have two wonderful Ayi's who cooked up some killer English breakfasts with freshly baked bread and all the trimmings each morning before we set out on 6 hour hikes. Moganshan is a sleepy little village dotted with abandoned mansions, where most people seem to know each other and the average age of residents is over 60. A special treat was the filtered well water which we could drink straight from the taps in our Naked Cabin - it was so delicious we filled up a couple of bottles for our trip back to Shanghai.

Sweet lady working away

View from the top of Moganshan Mountain

Ahhhh retire to the bedroom.

Deeeeep in the forest.

Drying fish? or bamboo?

Picking tea

The three hour tour...

Scenes of Shanghai

2009-07-22T23:42:00.000-07:00

Tiakang Lu, bamboo scaffolding

Tiakang Lu, having a chit chat

Tiakang Lu

Commerical Bribery in China - They're Comming to Get You.

2009-07-15T20:41:00.000-07:00

- New Interpretations of Criminal Commercial Bribery Cases -

Commercial bribes under the guise of gifts, entertainment, and favors have long catered to the operational norms of foreign and domestic businesses in China, where it is often hard to distinguish local customs from bribes. Statistics show that alarmingly, foreign companies have been involved in the majority of corruption scandals investigated in the PRC. Millions of dollars and items of value have been exchanged in thousands of cases of commercial bribery. A State news agency reported that in 2007, 1000 cases of bribery were uncovered in the health sector estimated at $4.3 million, and 7450 cases in the industrial sector with over $3.3 million in illicit gains. The PRC government remains focused on cracking down on bribes involved in property and land transactions, pharmaceutical sales, government procurement contracts and major construction projects, which due to their high profiles still remain the primary areas of scrutiny.

Administrative Violations.

Over the past decade China has enacted several laws and regulations to battle this illegal activity both through administrative and criminal sanctions. Commercial bribery was first recognized under provisions of the PRC Anti-unfair Competition Law which came into effect in 1993. This law defines administrative violations with respect to commercial bribery and was further reinforced and clarified by (i) The Tentative Provisions for the Prohibition of Acts of Commercial Bribery (1996); (ii) Opinions on the Launch of a Special Task Force to Tackle Commercial Bribery (2006); and (iii) Implementation Opinions on the Investigation and Treatment of Commercial Bribery by Law (2006).

Criminal Violations

The focus here is on certain classes of bribes which were criminalized in 1996 under the PRC Criminal Code (amended 2006) (the “Code”). Most recently, to shed light on the application of the Code, on November 20th, 2008 the Supreme People’s Court and the Supreme People’s Procuratorate released the Opinions on Several Issues Regarding the Application of Laws in Commercial Bribe-Related Criminal Cases (the “Opinions”). The Opinions clarify and expand the Code on the following issues:

I. Scope of commercial bribes;
II. Definition of “other organizations”;
III. Scope of criminal liabilities in medical, educational and government procurement;
IV. Gifts vs. bribes; and
V. Settlement of joint crimes between state and non-state personnel.

What Constitutes a Criminal Offence of Commercial Bribery?

Under the Code, ‘commercial bribery’ is defined as (i) the act of offering money or property to the personnel of a company or enterprise, a government official, or other organization; (ii) in return for a benefit or the assistance to obtain a benefit; (iii) involving a relatively large or very large amount.

Attempt and the Act of Asking are now part of the definition

Under judicial interpretation of the Code, the ‘act of offering bribes’ has commonly included cases involving persons (a) who in exchange for money or property of substantial value, take advantage of their standing to secure benefits for the briber; (b) who in the course of business, accept illegal kickbacks or commission; or (c) who offer bribes, kickbacks, or commission to government officials to illegally facilitate the course of business.

In one of the most significant changes, the Opinion has expanded the above definition of what actions constitute a bribe. Now amended, an actual bribe does not even have to be extended because violations also include (i) “seeking inappropriate benefits” - plainly said, the attempt of gaining unfair advantages through the violation of laws, regulations, rules or policies; or (ii) the act of asking the bribe recipient to make or help to make matters convenient through violation of laws, regulations, rules or policies.

“Other organizations” includes ad hoc organizations

The Opinions clarify that “other organizations” mentioned in the Code include not only private institutions, non-governmental organizations, civil organizations, village and neighbourhood committees, but also ad hoc organizations or certain business relationships such as those with contractors or event organizing committees and even ad hoc committees within an organization.

By What Definition is the Determination of ‘Money or Property’ Made?

Financial Benefits of Any Kind

Over the years bribery has taken various and sophisticated forms. Certain classes of bribes have clearly fallen under the Code’s definition of “offering of money or property” such as: tours/trips, resident permits, foreign passports, housing renovations, designer clothes and electronics, club memberships, etc. But the grey area of bribes which are difficult to categorize, although still remain illegal, fall under the not so obvious such as: zero to no interest loans, employment arrangements, admission into educational institutions, etc. The Opinion has tackled this issue by enlarging the statutory definition of bribes to distinctly include “inappropriate financial benefits” of any kind that bring illegitimate benefit to the recipient, with the specific amount subject to the actual gains or costs.

Bank Cards

For the first time in PRC bribery legislation, the Opinion specifically pointed, if bank cards are received under an act of bribery, that the actual account deposits will constitute the amount of the bribe, whether or not such amounts have actually been withdrawn or used. If the bank account is overdrawn, and the offering party is responsible for the balance of the account, the overdrawn sum shall also be deemed as a bribe.

Joint Settlement of Crimes between State and Non-state Personnel

Under the Code, state-personnel and non-state personnel are punished according to Articles 385 and 163 respectively. The thresholds and punishments for state vs. non-state personnel vary significantly. Under the Opinions, if non-state personnel together with state personnel jointly receive bribes they shall be prosecuted according to their respective crimes. If however, the principal and accessory cannot be distinguished then the crime shall be punished according to the more stringent bribery laws governing state-personnel.

What Criminal Liabilities are Specifically Expressed in the Opinions?

Although not explicitly stated, the Code was designed in such a way that the criminality of certain groups (such as those mentioned below) implicated in bribery was implied. The recent articulations in the Opinions with regard to medical and educational personnel and bid evaluation committees, demonstrates the Chinese government’s seriousness in its efforts to eradicate bribery.

Medical Purchases and Sales

By definition ‘medical personnel’ includes physicians, physician assistants, nurses, emergency medical technicians, dentists, etc. In China, by way of market design and medical expertise medical personnel retain a type of monopoly control over the choice of drugs and equipment available to their often uninformed patients. This often leads to rampant abuse of the system where bribes are exchanged to push the sale of drugs and equipment. The Opinions stress that state and non-state medical personnel, who abuse their position to obtain kickbacks or commissions from pharmaceutical companies and manufacturers of medical apparatus and supplies, will be subject their respective crimes under the Code.

Bid Evaluation Committees/ Government Procurement

The changes in this section are subtle though should not be ignored. The new rule states that:

A member of a legally established bid-evaluation committee, a negotiation panel of competitive negotiation procurement, or a consultation panel is prohibited from illegally receiving bribes to gain advantage for others in bids or government procurement processes.

With respect to government procurement, the Code focused specifically on the liabilities of ‘state personnel or related units’ as perpetrators. Now under the Opinions, any other ‘party’ which has some relation to the transaction may be deemed the offeree. In a practical move, the Opinion also considers these bribery actions in light of ‘industrial norms’ and indeterminate ‘rules’ and ‘policies’.

Bribes in Relation to Schools and Learning Institutions

Likely in reaction to the public outcry and scandals surrounding the collapsed school buildings in Sichuan Province earlier this year, the Opinions have especially mentioned punishment of bribes with respect to educational institutions from the procurement of books and supplies to the construction of buildings and sale of lands. Officials will be keeping a close eye on any profits made under these transactions.

Differentiating Gifts from Bribes

As in many neighbouring countries, in China gift giving is an important and socially beneficial function. When gifts are actually bribes is sometimes hard to distinguish because promotional gifts and customary holiday gifts are given year round. The Opinions have now elaborated the following factors which are taken into consideration when differentiating ordinary gifts from bribes.

(a) Relationship between the parties / background on the property or financial exchange

The courts will consider whether the parties are relatives or friends and other historical context relating to the transaction.

(b) Value of the property / financial exchange

Small Gifts: What may be considered ‘excessive’ is a matter of administrative or judicial discretion, but in most instances small gifts of insignificant value (pens, mugs, t-shirts, moon cakes) are generally acceptable. The caveat here is to be in line with prevailing commercial practices.
Travel and Meals: When guests are invited to events (such as medical symposiums), all meal and travel expenses should be duly recorded and directly related to the event. Particularly lavish meals and additional entertainment should be avoided.

Consideration is given to the circumstances that may have prompted the offeror, and whether the receiving party is in a position that may be manipulated to confer benefit on the offeror.
(d) Whether the receiving party takes advantage of his or her position to seek profits for the offering party

Minimizing Risk

Commercial bribery has become engrained into the way business is done in China because it is such a common social phenomenon. All links in a commercial chain are susceptible to corruption and keeping abreast of the most recent developments in PRC laws and regulations can aid companies in designing their internal compliance mechanisms and avoiding costly fines and/or imprisonment of those involved.

** this is not legal advice.

The Gay Leap Forward - Shanghai holds China's first Pride event

2009-06-24T00:06:00.000-07:00

From June 7th - June 13th 2009, Shanghai was host to China's first ever gay pride! From what I saw, this historical event was truly a wholesome experience for everyone involved - local or expat, straight or gay, young or old - it really didn't matter - this ShanghaiPride really touched the lives of many, and well it was just good fun! I heard a lot of stories about people bringing their parents or children as part of their coming out - and I would be lying if I said it didn't bring just a little tear to my eyes.

I know the organizers were run down to near exhaustion by the end of the week, after months and months of planning - and well I have to give it to them for working so hard to make this happen.

Here are some news links which provided coverage of the event:

CHINA DAILY
http://www.chinadaily.com.cn/cndy/2009-06/16/content_8286837.htm
http://www.chinadaily.com.cn/cndy/2009-06/10/content_8266057.htm

NPR
http://www.npr.org/templates/story/story.php?storyId=105405434

NEW YORK TIMES
http://www.nytimes.com/2009/06/15/world/asia/15shanghai.html?ref=world

NEWSWEEK
http://www.newsweek.com/id/201981?from=rss

BBC
http://news.bbc.co.uk/2/hi/asia-pacific/8083672.stm
http://news.bbc.co.uk/2/hi/asia-pacific/8093695.stm

REUTERS
http://www.reuters.com/article/lifestyleMolt/idUSTRE55C1UB20090613

THE ECONOMIST
http://www.economist.com/world/asia/displaystory.cfm?story_id=13877186

ASSOCIATED PRESS
http://www.google.com/hostednews/ap/article/ALeqM5hfoyK2CCVC2uH7RnX_ujwFroQUigD98T76PO2

THE ADVOCATE
http://www.advocate.com/news_detail_ektid89317.asp

LE MONDE
http://www.lemonde.fr/asie-pacifique/portfolio/2009/06/12/une-premiere-gay-pride-organisee-en-toute-discretion-en-chine_1205397_3216.html

Piercing the Corporate Veil: Shareholder and Director Liability in China

2009-06-15T00:51:00.000-07:00

I. Introduction
The corporate law doctrine ‘Piercing the Corporate Veil’ refers to a longstanding common law concept in which a corporate shareholder or director is held responsible for the liabilities or debts of a corporation in excess of their capital contributions; notwithstanding the general principal - that corporate shareholders and directors are immune from contract or tort liability when acting under the auspice of a corporation.

Under the PRC Company Law (effective January 1, 2006) and related judicial opinions issued thereafter, there are several instances where PRC courts will find it necessary to look beyond the ‘legal fiction’ of a corporate person or entity and lift the corporate veil - to hold owners and those who run group companies jointly and severally liable for the debts of a company.

In the current economic climate as companies face restructuring, bankruptcies and forced closures, the issue of piercing the corporate veil has become more relevant. Those in charge must ensure that they do not abuse the independent legal status of their invested companies nor use their limited liability status to evade payment of debts. Private equity and venture capital firms especially risk exposing their entire funds to liability, and foreign investors who operate in China by way of numerous subsidiaries should be especially cautious so as not to expose the parent corporation to liability.

Examined below are the main features of the PRC’s application of the corporate veil doctrine and some recommendations for best practices.

II. What are the PRC Courts’ justifications for piercing the corporate veil?

Listed below are examples of improper formation and fraudulent and unfair corporate practices which will prompt piercing of the corporate veil in the PRC.

A. Invested companies that are deemed to lack independent legal person status.

(i) Failure to pay-up registered capital.
Even if a business license has been issued, if investors fail to in fact fully pay up their subscribed registered capital, the invested company will not be deemed to have independent legal person status.

(ii) Pre-maturely withdrawing registered capital.
Withdrawal of registered capital immediately after it has been paid-up is another circumstance where PRC courts will find that the registered capital has not in fact been paid-up and therefore the invested company does not have independent legal person status.

(iii) Round-tripping investments.
When capital that originated in the PRC exits and then re-enters the PRC as a foreign investment, it is referred to as round-tripping and is considered a ‘fake foreign investment’. In such cases, when the actual capital requirements as prescribed by the Ministry of Finance are not met, the foreign invested enterprise will be deemed as improperly formed and the ultimate investor whether on-shore or off-shore will be exposed to liability.

B. Parent company that meddles in the assets and operations of its invested company.

If there is a claim of ‘an abuse of the company’s independent legal status’, the burden of proof rests on the shareholders to prove that their assets are independent from the invested company’s assets.

Examples of such excessive meddling include:

 Where the parent company and its invested company enter into related party transactions which are detrimental to the investee.
 Where the parent company uses, claims, or does not otherwise differentiate assets of the invested company with its own.
 Where the management and control over an invested company is fictional and actual authority is exercised by the parent company.

III. Can China pursue foreign investors for liability in their home country?

In the absence of a bilateral or multilateral judicial assistance treaty, legislation of the country in question will dictate whether its courts will enforce a judgement rendered in China.

Common Law Jurisdictions. In common law jurisdictions such as Hong Kong, England, Canada, South Africa and the United States, a Chinese judgement may be generally enforced through case law. Creditors may seek enforcement through (a) breach of contract claim on an implied promise to pay, or otherwise as (b) a debt claim.

Civil Law Jurisdictions. In civil law jurisdictions such as France, Japan, Italy, Spain, Mexico, Switzerland and Belgium, national statutes constitute the exclusive basis for determining jurisdiction over Chinese judgements and prior judicial opinions play a slighter role in determining the outcome.

Test for Jurisdiction. In both civil and common law countries a relevant court’s jurisdiction over a particular defendant will depend on factors such as (i) domicile, (ii) notice, (ii) forum selection clause, (iii) location of assets (such as a bank account), and (iv) connection between the subject matter of the case and activities carried out by the defendant in the particular jurisdiction. Each country will have its own set of rules as to what constitutes a suitable basis to assert jurisdiction and generally the test is of compatibility between the Chinese court’s basis for assertion of jurisdiction when compared to its own laws.

IV. Best Practices
It is commonly understood that in the PRC maintaining a favourable image in the eyes of government authorities can ensure smooth operations of a business. Leaving pending legal issues unattended to is never recommended. In order to avoid joint and several liability for corporate debts, below are some examples of practices that should be strictly adhered to.

A. Follow proper dissolution and liquidation procedures.
If it is necessary to dissolve a company for any of the statutory reasons listed under the Company Law, it is important to, among others, notify the authorities and make a public announcement, form a liquidation committee to deal with pending matters, and pay off all outstanding taxes, debt and employee salaries and benefits.

B. If necessary, file for bankruptcy.
If after liquidation, the company’s property will not offset the outstanding debts, bankruptcy may be filed for by either the creditor or the company.

C. Keep accurate accounting records.
Although foreign corporations are obligated to report accounting and financial records according to the jurisdiction where they have been incorporated, with respect to invested companies in the PRC additional records should be kept according to standards set by PRC law and maintained in Chinese, with audits conducted by a PRC qualified firm.

D. Insulate liability through an offshore holding company.
To prevent the jurisdictional reach of China’s courts, if possible off-shore holding companies should be used to insulate the company from exposure of its entire asset base, because any further piercing of the corporate veil will be determined by the jurisdiction where the holding company is incorporated.

**and remember this is not legal advice!

Don't Forget Employer's Duties When Drafting Non-Compete Clauses

2009-06-01T00:19:00.000-07:00

A Beijing Court recently rejected an employer’s claim for RMB 300,000 for a former employee's breach of a non-compete agreement.

Employer and Employee signed a Confidentiality and Non-Compete Agreement, which basically stipulated that during the term of the labour employment and the effective period thereafter, Employee should not hold a part-time job or otherwise affiliate itself with a competitor or lure employees or customers away from employer (pretty general terms). The agreement did not however mention the Employees ‘rights’ or otherwise the Employer’s ‘duties’ with respect to the above obligation to not compete. Employee eventually left the position, and Employer paid Employee the non-compete compensation; but then appealed to the Beijing Arbitration Committee for the RMB 300,000 for the alleged breach. The appeal was rejected and the Employer brought the case to court.

The Court held....
In a Confidentiality and Non-Compete Agreement “both parties should be entitled to equal rights and responsibilities”. Since the agreement only stated the Employees responsibilities and failed to state the rights to which Employee is entitled to for compliance with its obligations, the contents of the agreement were deemed to be unfair and unbinding on the Employee. (Even though the Employer did infact remit the non-compete compensation)

Another example of how careful drafting can save the day.
* This is not legal advice

Social Media and Legal Booboos

2009-05-20T01:00:00.000-07:00

Twitter, Facebook, Myspace, YouTube, are among the list of many Web 2.0 social media technologies that individuals and companies are increasingly using to engage with each other and with the public at large. Even the president is using it! http://twitter.com/BarackObama. And my dog.

The benefits of such mediums range far and wide, from creating collaborative and open platforms for the transfer of ideas, the fostering of common interests, tending to customer complaints, the rapid dissemination of information, and engaging employees and stakeholders of all kinds. However, in situations like the Domino Pizza Case, where a video portraying two employees doing some very bad things while on the job was posted on YouTube and received almost 1 million hits, its very clear that a number of legal implications can arise.

Some legal areas to watch out for that instantly come to mind include:
Tort – defamation, harassment, vicarious company liability.
IP – copyright and trademark issues.
Privacy – of employees, clients, trade secrets, other privileged information.

A clear set of rules and guidelines with respect to use of Social Media Technologies should be an indispensable part of your employee manual, which should already be an indispensable part of your employment plan (check out my earlier post on Working Guide on China's Labor Contract Law). All employees should be trained in Web 2.0 etiquette; the systems constantly audited; and most importantly make them sign acknowledgment forms.

For a good example of how to responsibly involve your employees in the world of Web 2.0, check out IBM’s Social Computing Guidelines

**And remember, nothing contained in this blog is legal advice

FDI China - Highlights of the 2009 Regulatory Framework

2009-05-11T20:04:00.000-07:00

I. Laws and Regulations to Watch For in 2009

§ Foreign Investment Directory for the Middle and Western Regions (effective January 1, 2009)
- Incentives and preferential treatment with respect to taxes, interest on loans, and reduced rent on industrial use purpose land will be individually determined by each autonomous region, province and municipality.

- Foreign investment is encouraged in areas of environmental protection, agriculture, infrastructure and upgrades in industrial technology.

§ Greater Tax Rebates on Exports (effective January 1, 2009)
- Higher rebates on 533 high-tech products and machines.

§ Supplementary Provisions to the Measures for the Administration of Foreign Investment in the Commercial Sector (IV) (effective February 5, 2009)

- The purpose of these measures are to encourage “service providers” (as defined by CEPA) from Hong Kong and Macau to establish commercial enterprises in mainland China by way of allowing formation of WOFEs if such service provider (i) has established over 30 shops in mainland China, and (ii) deals in goods commodities such as medicine, fertilizers, pesticides, sugar, cotton, etc., - which are sold under different brands from different suppliers.

§ Measures for the Administration of Overseas Investment (effective May 1, 2009)

- Applying to both greenfield and M&A investments, these measures support outbound Chinese investments and include an overall simplification of approval procedures. The greatest impact will be in cases of small investments (i.e., under US$ 10 million) where approval power will vest in provincial level MOFCOM offices, and approvals can be expected within three (3) business days of filing.

§ Food Safety Law and its Implementation Rules (effective June 1, 2009)

- The highlights of this new law which will supersede the existing China Food Sanitation Law include (i) an improved monitoring and supervision system which will include the departments of Heath, Quality Supervision and Industry and Commerce and Agriculture, (ii) introduction of provincial level safety commissions, (iii) national level food safety standards, (iv) cancellation of exemptions from inspections, (v) articulation of food recall procedures (vi) harsh penalties for offenders with the possibility of criminal sanctions for severe cases.

§ Patent Law Amendment (effective October 1, 2009)

Some Highlights of the law include:

- Required Identification of Genetic Information – The amendments in the Patent Law along with the amendments in the Genetic Resource Law aim to protect the source of genetic material (namely China’s resources) by requiring patent applications to identify the heredity or source of genetic resources (i.e., animal, microbial, or plant). Protection of genetic information will only be granted provided the inventor reveals the source of genetic information to the Intellectual Property Bureau, and an explanation will have to be given in cases where the source or heredity cannot be identified.

- Compulsory Licenses for Patented Pharmaceuticals – Such licenses will be granted by the State Council, to manufacturers of medicines for export, which are already protected by Chinese patents, in cases where there is a strong public interest such as (i) where countries have entered into relevant treaties with China, or (ii) where the designated country of export is unable to produce such pharmaceuticals. This rule may undermine innovation and inventiveness.

- Increased Penalties – A patent holder may now claim for reasonable expenses incurred for stopping an infringement, and the maximum statutory damages for infringements have been increased to RMB 1 million.

- Implementation of an Absolute Novelty/Inventiveness Standard – Prior disclosure of any kind anywhere in the world (e.g. public use) may be cited as prior art against the (a) inventiveness or novelty of a utility patent application, or (b) novelty of a design patent. Design patents are also required to be substantially different from prior designs and from designs which are combinations of existing patents.

- Use of Patented Pharmaceuticals/Medical Equipment in Clinical Trials – Importation, production, and use of patented pharmaceuticals and medical equipment will be exempted from patent infringement if such uses are for administrative approval purposes.

- First Filing Requirement Replaced with National Security Review – The often circumvented first filing requirement is now replaced with the requirement that if one ever desires to secure a patent in China, before filing a patent in any country, a national security review must first be conducted by the State Intellectual Property Office of China (which may take 2 to 4 months), the details of which will be set forth in the expected Implementing Regulations of the Patent Law.

Highlights from 2008

I. Favoring Real Estate Investors

§ Since 2006, the Chinese government took regulatory action to cool down foreign investment in the overheated property market in China. However, its approach to foreign investment in the real estate sector shifted radically by the end of 2008 in response to the financial crisis. Some highlights include:

- Uniform Real Estate Tax - Starting January 1, 2009 uniform real estate tax is applicable to foreign and domestic real estate investors under the Provisional Regulations on Real Estate Tax of the PRC.

- Beijing Relaxes Rules for Foreign Purchasers for One Year – In the 2009 calendar year, foreigners may purchase property in Beijing without having to meet the one year residency requirement and the use purpose of the property will not be limited to self-use.

- Shanghai Allows for Foreign Currency Deposit Accounts for Land Payments - Foreign investors without any existing PRC establishments may open foreign currency deposit accounts for the purpose of paying land security deposits, allowing them to actively participate in land bidding.

- Filings Reviewed by Provincial Authorities – Under MOFCOM’s Notice 23, from June 18, 2008, review of filings on foreign investment projects have been delegated to its provincial level authorities, which indicates that the approval process should speed up.

II. Favouring Domestic Growth

§ Policy has shifted from favouring export oriented businesses to focusing on quality investments geared toward domestic led growth. This shift can be attributed to directives of the 11th 5 year plan on the Utilization of Foreign Investment.

§ Incentives under the 11th 5 year plan: as provided for in the 2007 Catalogue of Foreign Investment and the 2008 Catalogue of Foreign Investment in the Central and Western Regions

- Greatly expanded list of encouraged industries.
- Tax incentives for investment in Central and Western regions.

§ Prohibitions under the 11th 5 year plan:
- Solely export oriented projects.

- Projects listed in the 2005 Catalogue of Industrial Restructuring: such as those which waste electricity or raw materials; or those which pollute excessively or depend on outdated technology.

- Projects which focus on low value added consumer goods (toys, clothing, etc.), with low investment, use of low technology, and high employment of unskilled labour.

III. Favoring Establishment of Multinational Regional Headquarters in Shanghai

The Provisions of Shanghai Municipality on Encouraging the Establishment of Regional Headquarters by Multinational Corporations (effective on July 7, 2008)

Circular on the Implementation of Regulations on the Establishment of Multinational Headquarters in Shanghai, No. 28, Hufufa (effective November 15, 2008)

§ Major incentives include:
- Rental incentives of between RMB 500,000 – RMB 1,000,000 on leases with an area of more than 1,000 square meters and a minimum of a 3 year term.

- One time grant of (i) RMB 5 million for Management Companies whose annual turnover exceeds RMB 50 million; or (ii) RMB 10 million for Holding Companies whose annual turnover exceeds RMB 100 million.

- Other incentives include, (a) lower threshold of accumulated paid in capital, (b) broader permitted scope of business services, (c) relaxed rules on visas, work permits, and foreign employment certificates, and (d) simplified foreign currency conversions, and customs clearance and quarantines procedures for qualified bonded logistics and distribution centers.

Working Guide on China's Labor Contract Law**

2009-04-29T21:28:00.000-07:00

Introduction

In the People’s Republic of China (“China” or “PRC”), employment related matters are governed by a multitude of laws which include:

· Trade Union Law of the PRC (1994);
· Regulations on Labour Management in Foreign Investment Enterprises (1994);
· Labour Law of the PRC (amended 1995);
· Company Law of the PRC (amended 2006);
· Law of the PRC on the Mediation and Arbitration of Employment Disputes (effective May 1, 2008); and
· Various municipal and local regulations, promulgated in accordance with the Labour Law of the PRC (together the “Existing Law”).

The Existing Law has most recently been supplemented and clarified by the Labour Contract Law of the PRC (effective January 1, 2008) and the Implementing Regulations on the Labour Contract Law of the PRC released on September 18, 2008, and taking effect that day (together the “LCL”). The LCL codifies widely accepted practices rooted in policies of the Ministry of Labour and Social Security (“MOL”) and was also promulgated in response to rampant worker abuse (e.g. dangerous conditions, long hours, etc.) and a further attempt to bring China’s employment laws more in line with other developed nations. Highlights of the LCL include a new private right of action for workers, limitations on probationary periods, a section devoted entirely to staffing firms, and clarification on compensation under various circumstances. Since the LCL went into effect, labour disputes have increased throughout the nation by well over 100%. Nanjing’s cases alone went up 231% in this past year. Below is a guideline to interpret the LCL.

I. Preliminary Measures Employers Must Take to be In Line with the LCL
Caveat - unlike the Existing Law where an actual contract was required to create an employment relationship, under the LCL if any money exchanges hands or an employee begins work, an employment relationship is created.

A. Labour Term and Required Provisions of a Labour Contract
The LCL, like most other employment laws divides employment contracts into three types: (i) fixed term – with an agreed end date; (ii) open-ended – no stipulated expiry date; and (iii) contract/ project based – terminates on completion of a certain job. After negotiation, an employer and employee must sign (or seal) a contract in at least two originals of which each party will hold one. An employment contract shall at minimum specify the following:

(a) name, address and legal contact of the employer;
(b) name, address and ID number of employee;
(c) term of contract;
(d) job description and site location;
(e) working hours, rest, holidays;
(f) compensation (per month or per annum);
(g) allocation to the 5 social insurance funds (pension, medical, maternity, accident, and unemployment insurances)[1];
(h) working conditions and protection against occupational hazards; and
(i) others stipulated by PRC law.

Agreements for “Part-time Labour”, in which the employee works no more than 4 hours a day and no more than 24 hours in a week for the same employer, may be concluded orally – and such employee must be compensated every 15 days (or less). Either party may terminate a part-time labour arrangement with notice at anytime, and no severance pay is necessary.

ü Note: labour contracts must be written in Chinese, but may be accompanied by any language translations. In case of discrepancies between the language versions, the Chinese version will prevail.

ü Note: an employer may not collect or retain any collateral from the employee (i.e. ID card or personal property etc.).

B. Timely Entry into Labour Contracts Required of Employers
Regardless of when a formal contract is issued, the “employment relationship” is considered established on the day the worker starts working for the employer (not when a contract is signed). Employers have a grace period of up to one (1) month from the establishment of an employment relationship in which to conclude an employment contract. Employers that fail to enter into employment contracts with their employees within the grace period will be responsible for double (2x) the month’s salary for each month thereafter without a formal contract (up to a year). If after a year, a labour contract is still not concluded, the employment relationship shall be considered open-ended (starting from the last day of that year) and the employer is required to immediately enter into a written contract.

C. Employee Handbook, the Single Most Valuable Tool in Avoiding a Labour Dispute
A written employee handbook or policy manual setting out thorough internal rules and regulations must be maintained and updated (even if employing only one worker) and should be incorporated into the employment contract by reference. Contents of such handbook may include, among others: code of conduct, conflicts resolution, use of company resources, confidentiality, grounds for termination, etc. The purpose is to be comprehensive nearly to the point of being exhaustive, because under the LCL, firing an employee is basically impossible without “cause” – and it is the employee handbook that will be referenced when defining cause.

D. Register of Employees and Reporting Requirements

A “Register of Employees” should be kept at all times for reference purposes and shall include particulars such as:
employees’ name, gender, ID number, registered permanent address, current residence, contract details, method and details of employment (whether directly hired or seconded), contract term, etc. An Employer can be fined between RMB 2,000 and RMB 20, 000 for failure to rectify a violation with respect to this rule.

In December 2006, the MOL issued guidelines requiring employers to within thirty (30) days of hiring new employees or renewing labour contracts, report the following information to the local labour bureau:
number of employees it is hiring; and
an updated Register of Employees.

Within seven (7) days of ending an employment relationship, employers must report:
§ The numbers of employees being terminated.

And according to the LCL, within fifteen (15) days of ending an employment relationship, employers must carry out procedures for transfer of the employee’s file and social insurance; disburse severance pay (as calculated below in Section II. D. (v)). And such terminated contracts shall be kept on file for two (2) years, for reference purposes.

II. Clarification of Specific Employment Contract Related Issues

A. Limitation on Probationary Periods
The limitations on probationary periods have the greatest impact on the rights of seasonal workers who under the Existing Law have been under arbitrary threat of being fired prior to termination of their short term contracts and generally were being underpaid. The LCL mandates that an employer may only set a probationary period once per employee regardless of how many times a contract is renewed. Also the wages of a probationary worker: (i) may not be less than 80% of the wage stipulated in the contract or less than 80% of the lowest wage level for the same job if no salary has been agreed; and (ii) may not be less than the minimum wage where the employer is located. The probationary periods should be set according to the following schedule:

3 months and < 1 year 1 month
> 1 year and < 3 years 2 months
3 years or open-ended 6 months
< 3 months or contract/project based No permissible probation period

B. Training Expenses and Employees’ Liquidated Damages for Prematurely Terminating
Employers that provide specially funded employee training (over and above that required by the State), may require that workers at minimum continue employment for a specified term or else subject them to payment of liquidated damages which: (i) shall be calculated based on the portion of training expenses allocable to the unperformed term of service; and (ii) in total shall not exceed the cost of the training expenses. These expenses may include, among others, travel, accommodation and food, trainer fees, and other direct expenses paid by the employer with respect to the training (evidenced by receipts).

C. Not all Employees can be bound by Non-compete and Confidentiality Obligations
Non-compete and confidentially obligations may only be imposed on senior management, senior technical personnel and employees that have access to business secrets of the employer, and can be no longer than two (2) years. ‘Senior management’ is clarified with reference to the Company Law and includes: managers (general, deputy, financial), board secretaries, and others specified in the company’s articles of association. Such covenant should be included in the employment contract or in a separate writing and must include the scope, territory, and terms of restrictions, along with stipulated monthly economic compensation throughout the duration of the covenant (which means compensation up to two years after termination of the employment relationship). The laws remain silent as to what is the minimally acceptable rate of economic compensation in this regard.

D. Employer’s Duty to Compensate under Various Circumstances

(i) No written contract –
If it is not clear what labour compensation was agreed, the rate shall be that specified in the enterprise’s or industry’s collective contract; if there is no collective contract, then fair pay should be given for the work, presumably based on market standards. See Section I. B. above, for penalties associated with no written contract.

(ii) Lay-offs –
See Severance Pay below and Section III. C. below for rules governing layoffs.

(iii) Overtime –
In China, standard working hours are: 8 hours a day/ 5 days per week with a maximum of 40 hrs per week, and 2 days of rest. These standards shall strictly be adhered to; meaning employers may not compel or used disguised manners to compel employers to work overtime. Statutes specify that such compensation shall be paid under condition that employers “arrange” for such overtime – in a plain sense, the employer must unambiguously ask a worker to perform overtime, although the rules defining “overtime” still remain vague in this regard. Any overtime work must be compensated according to the following schedule:

Work Day 150%
Day of Rest 200%
National Public Holidays[2] 300%
* based on actual salary

(iv) Unlawful Termination by Employer
If after an unlawful termination by the employer the employment relation is not resumed, due to impossibility or simply because the worker refuses, the employer is responsible for severance pay at twice (2x) the rate of severance pay (see below).

(v) Severance Pay
The calculation for severance pay = [number of years worked x average monthly wage (based on the last 12 months of employment)].

If however, the employee’s average monthly wage is greater than three times (3x) the average monthly wage in the relevant municipality, (i) the average monthly wage will be calculated based on (3x) the average municipal rate instead of the actual average, and (ii) the years of employment shall be capped at 12 years.

The circumstances giving rise to the employer’s duty to make severance payments are outlined in Article 46 of the LCL and the employer shall make such payments within fifteen (15) days of the date of termination. Interestingly, an Employer will be required to make a severance payment, if after the expiration of a fixed-term contract, an Employer does not offer to renew the contract on equal or better terms.

ü Note: for the purpose of calculating severance pay, any period less than 1 year shall be counted as 1 year.
ü Note: an employee is only entitled to half a month’s wages for service less than 6 months. Project based and seasonal workers are also entitled to severance pay.
ü Note: salary, bonuses, allowance and subsidies should be included in the figure.
ü Note: employers are not liable for additional severance pay if damages have already been paid to the employee for illegal termination of the contract.

(vi) Work Related Injury
For employees suffering work related injuries, in addition to severance pay (as calculated above), the employer shall also pay a medical and disability subsidy in one lump sum, according to the State’s regulations on work related injuries.

E. Dispute Resolution
Under the Mediation and Arbitration Law (May 1, 2008), the statute of limitations (“SOL”) for bringing a claim: (i) under an existing contract is 1 year after its termination or expiry; or (ii) if the contract has already expired, 1 year after the employee knew or should have known of an infringement. The following describes the process of a claim:
1. The dispute must be submitted to the local labour arbitration committee within the SOL;

2. Within 45 days after acceptance of the case, an award shall be rendered;

3. Arbitration decisions are final on the following issues: severance pay, salaries, medical fees for job related injuries and penalties (provided such amounts do not exceed 12 months minimum wage in the particular jurisdiction); and

4. Within fifteen (15) days of the arbitration decision either party may submit the dispute to the people’s court for a hearing (except for those issues listed as final above). Otherwise, the decision is final and binding.

Mediation is always the preferred method of dispute settlement as it requires much less strain on judicial resources. The Mediation and Arbitration Law stipulates that mediated settlements on severance pay, salaries, medical fees for job related injuries and penalties, can be entered into a people’s court for legal binding.

F. Other Points
Ø Employees may refuse to work in dangerous conditions.
Ø Existing contracts will survive mergers or acquisitions.
Ø Changes in name, legal representative, investor, person in charge etc., will not alter employment relationships, and Employers are required to honour those existing contracts.

III. Termination of Employment Contracts

A. What are conditions for indefinite employment?
Under the following situations an “open-ended contract” (as defined in Section A. I., above) should be concluded, thus creating an indefinite employment relationship:

1. At renewal, the employee has been working for the employer for a “consecutive period” of 10 years or more. When defining “consecutive” if an employee moves between employers due to corporate decisions, restructuring, or administrative decisions, the time with the old employer will be counted when determining the consecutive period. Also if after 10 years, as calculated above, an employee under the following circumstances wishes to enter into an open-ended contract, the employer is required to do so, if the employee:
· was exposed to dangerous conditions and not has had a health check prior to leaving, or is undergoing medical examination for a suspected occupation related disease/disorder.
· is recovering from a non-work related injury/illness.
· is pregnant or nursing.

2. If renewal occurs after the conclusion of two consecutive fixed-term contracts. Note: if an employee continues work after termination of a fixed-term contract and the employer has taken no such measures to end the employment relationship, a natural extension of the fixed-term contract will be presumed – and may, if it is the 3rd consecutive period, render the employee eligible for an open-ended contract.

3. If after a year a written labour contract is still not entered into (See Section I. B., above for details).
ü Note: open-ended contracts in the above situations can only be avoided if the employee explicitly states that he/she wishes to enter into a fixed-term contract.

B. Statutory Termination of Employment Contracts
An employment contract shall terminate automatically under the following circumstances:
· expiry of term;
· employee beings legally drawing his/her pension (i.e. retires);
· employee dies, or is declared missing by a court;
· employer is bankrupt, dissolved, has business license revoked, or is ordered to close; or
· others as mandated by law.

An exception to this rule can be found in Article 45 of the LCL which protects certain workers from statutory termination, such as those close to retirement, pregnant or nursing, or those that have not cleared health checks after being exposed to occupational hazards. How a bankrupt or dissolved company may actually handle such a situation has yet to be seen. Note the above circumstances will also protect a worker from termination by lay-off or termination with notice.
ü Note: the employer and employee may not contract for termination under any other circumstances other than the statutory grounds listed in Article 44.

C. Lay- Offs
A lay-off is qualified as a reduction of 20 or more employees or 10% or more of the company’s workforce. Provided notice is given to the labour union or all employees thirty (30) days in advance, under the LCL, the employer has quite some leeway in justifying a lay-off. In addition to the obvious situations of: restructuring, insolvency, serious business and operational difficulties; the LCL further permits lay-offs when a company changes its production, or adjusts or reforms its overall business and technology, or if circumstances render the company unable to honour its employment contracts.

In the case of a planned lay-off, the LCL protects employees who are the sole breadwinners, long-term employees, and those employees with open-term contracts. Additionally, if within six (6) months, the employee is in a position to rehire it shall give notice and priority to those laid-off.

D. Employer and Employee Initiated Termination of Employment Contracts

The LCL codifies 14 circumstances in which employers may terminate employment contracts; and 13 circumstances in which employees may do the same. Much of these provisions are a reiteration of the Existing Law with the following highlights:
· Employees still under probation are required to give 3 days’ prior written notice to the employer to terminate.
· Employees faced with dangerous conditions, illegal threats or work by force may immediately terminate. And along the lines of general contract principles, employers/employees who were threatened or illegally coerced into forming a contract may terminate such due to invalidity.
· Employers may terminate contracts with employees that establish employment elsewhere that materially interferes with employment with the employer.

IV. Will Labour Unions be Effective in Bargaining for their Employees?
The All China Federation of Trade Unions (“ACFTU”) is State controlled and China’s only authorized legal labour union. Workers may not be refused their right to unionize in China. A minimum of twenty-five signatures are needed to establish a branch. Once a union is formed the Employer is required to pay 2% of the payroll as union fees. Statutorily speaking, the LCL involves unions to a greater degree than the Existing Law in the negotiation process of collective employment contracts. Whether or not unions are effective however, will depend on how independent they are from management control.

V. Staffing Firms
The LCL devotes an entire section to staffing firms and formally codifies “tri-party” employment relationships. Although staffing firms fulfil the obligations of employers with respect to employment contracts, companies should be aware that they will be held jointly and severally liable (between RMB 1,000 and RMB 5000 per employee) for serious LCL violations of seconded employees. Because of this employers may not evade their responsibilities owed to employees.

ü Note: employers are prohibited from establishing staffing firms to second employees to themselves.
ü Note: staffing firms may not hire part-time employees for placement purposes.
ü Note: these rules are also relevant to “representative offices” of foreign companies in China which hire their employees through staffing agencies.

VI. Conflict of Laws
Generally speaking with respect to employment contracts, the LCL takes precedence over all the other employment related laws - although those labour contracts signed before 2008 are still subject to the Labour Law. However, if another employment related law that was enacted before the LCL is more specific on a particular subject and the LCL does not cover such subject, its relevant clause(s) will take precedence over the LCL.

[1] These funds generally do not apply to expatriate employees because of local bureaucratic issues with regard to implementation of such funds. For expatriates, these types of insurances are generally arranged through private insurance agencies rather than through State mandated funds.

[2] New Years Day (January 1st); Spring Festival (3 days); Women’s Day (Half day March 8th for women); Quingming Festival (April 5th); May Day (May 1st); Dragon Boat Festival (1 day); Mid-autumn Festival (1 day); National Day (3 days). Note: to accommodate these holidays, employers may require workers to work weekends preceding or after such holidays.

**(this is not legal advice!)

Drug Price Reform in China: How Exactly Will Consumer Prices Go Down?

2009-03-04T23:03:00.000-08:00

In China, on average, approximately 50% of healthcare expenditures by individuals are made on pharmaceuticals. The pharmaceutical industry is one of the principal industries in China with an average annual growth rate of 16.72% per year. China has steadily gained international market share afforded by its low cost manufacturing and is already the world’s leading producer of active ingredients used in brand name and generic drugs. Cost savings with respect to medical and clinical trials, human capital, and use of existing research facilities have long been attracting foreign investments in Chinese R&D centres, distribution channels and manufactories. However, such savings have not been readily passed on to Chinese consumers. In China, insufficient funding has caused hospitals to aggressively seek revenue through pharmaceutical sales which has led to the present state of over prescribing and over priced pharmaceuticals along with the undermining of public health.

On October 14th 2008, the State Food and Drug Administration (“SFDA”) released the anticipated proposal on the health care reform plan for public review[1] (“Proposal”). One of the most ambitious propositions in the Proposal centres on drug pricing reform.
[1] Draft Proposal available at: shs.ndrc.gov.cn/yg (public review forum will close on November 14th 2008).

I. How are Drugs Priced in China?
In China pharmaceutical prices are either determined by market forces, or otherwise by statutory guidelines which are included in the following laws:

§ Drug Administration Law and its Implementation Rules (2004) (Chapter VII);

If drug prices are fixed or guided by the government, the price should reflect, among others, the principals in the Pricing Law of the PRC, and the average social cost, affordability, supply and demand, to ensure that prices are commensurate with quality, so as to protect the legitimate interests of consumers.

§ National Development and Reform Commission (“NDRC”), “Measures on Government Pricing of Pharmaceuticals” (2000), and SDRC “Implementing Rules on the Law of Pharmaceutical Administration (August, 2002);

For Class A drugs, the SDRC will set the maximum retail prices; while wholesale prices may be determined by the market. For Class B drugs, the SDRC will set maximum price guidelines for provincial level governments. In-house drug prices are based on manufacturing costs plus 5% in profits. See pricing mechanisms for non-listed drugs below.

§ Pricing Law of the PRC (May 1, 1998 ); and

§ PRC Law on the Administration of Drugs (December 1, 2001).

Consumers Suffer Due to Mark-ups Along the Distribution Chain.
The Chinese drug distribution sector is at best highly fragmented. The three tiered distribution chain starts with the manufacturer, then: (i) national distributors (e.g. located in Beijing, Shanghai, Guangzhou, Tianjin, Shenyang), (ii) provincial distributors, and (iii) county and city wholesalers (and occasionally at the bottom of the chain hard to reach retail stores). The end users are either hospitals or franchised retail drug stores, with hospitals being the main market accounting for 80% of drug sales.

Drug prices which according to law may be determined by the market are based on manufacturing and operating costs which are self-reported by manufacturers. Drug manufacturers have incentive to mark-up their operating costs to increase their margins - also directly affecting the margins of the entire distribution chain. The government capped mark-up is set at 15%. However in practice, retail prices illegally extend well over the statutory margin. The NDRC has reported that hospitals collect the largest percentage of the final price for a bottle of pharmaceuticals (as sold to patients) at 45-50% (with 30% representing their mark-up), further up the chain the distributors collect an additional 20-25% and manufacturers on average collect 30% of the final sale price. About 20% is lost to illegal mechanisms that encourage doctors and hospitals to prescribe drugs. What remains are unaffordable prices and pushed sales on unwitting consumers.

What is the Real Root of the Pricing Problems?
Authorities have attempted to cure the issue of overpriced drugs by exercise of 24 nationwide price cuts from 2001 to 2007. The centralized tendering drug procurement policy of 1999 was another attempt to overcome corruption and excessive drug prices. Although these measures reduce the wholesale prices of drugs they still do not address the core of the retail pricing problems which are connected to several factors including lack of fiscal subsidies for hospitals which rely on pharmaceutical sales as their major source of revenue, and underpaid doctors who by way of medical expertise retain a monopoly over the choice of drugs available to patients. Adding to the over-pricing problem are mark-ups from companies with unachievable economies of scale due to outdated technology and the chaos in the distribution system.

II. The Future of Drug Pricing in China
The Proposal pledges to set up a healthcare system by 2020 that provides all urban and rural residents “safe, effective, convenient, and affordable” healthcare.

Management of Medical Institutions
The drafters recognize that high retail drug prices are connected to the funding issues faced by doctors and hospitals and recommends improvement of wages and to separate the management function of hospitals from treatment and expenditure of drugs. In a further attempt to alleviate hospitals’ reliance on drug sales for revenues, the Proposal mentions amending service fees, which translates to a price hike for hospital visits and in-patient services. The authorities wish to reintroduce similar subsidies for medical institutions as were used pre 1980 when the government paid for everyone’s healthcare - how exactly this will be implemented is not specified. For the public, the Proposal speaks of an establishment of a personnel system to improve the quality of medical services, and a system that strictly defines the appropriate use of technology, workforce, and pharmaceuticals. The Proposal further outlines standardized drug and medical checks, but again still vague on the points. The issues that remain here are the regression of medical diagnostics and the simple fact of unenforceability. Hospital visits will generate more revenue and doctors will be paid more, but will this be enough to curb the retail prices of pharmaceuticals?

Essential Medicines
Essential drugs are those that “satisfy the priority healthcare needs of the population; they are intended to be available within the context of functioning health systems at all times in adequate amounts, in appropriate dosage forms, with assured quality….and at an affordable price.”[1]

Under the Proposal China would like to create a national system of essential drugs and aspires to, by 2010, provide access to affordable and safe drugs to 80% of the population. This system will establish a catalogue of necessary drugs to be produced and distributed under government supervision with the aim to make the most basic and indispensable medicines such as penicillin safe and available in the market. For essential drugs, the government wishes to take macro-control of the existing distribution system and use a centralized purchasing system.

Furthermore in an effort to increase price transparency; the Proposal makes a bold proposition to subject essential drugs to new labelling requirements of printing drug prices conspicuously on the outer packaging. This labelling requirement aims to curtail industry wide margins and will most certainly transform the distribution systems and may possibly cut out the smaller middlemen.

Conclusion
The Proposal closed for comment on November 14th. Several white papers on this topic will be released by experts early next year. At present the wording of the Proposal is too general to leave a particularly impressive forecast although it appears the focus is on essential drugs. Authorities have responded that the Proposal is merely a guideline and will be followed by a formal legislation and at least eight implementing rules. Overall the public is most concerned whether the limited funding will actually be used where it is needed the most.
[1] as defined by the World Health Organization.

** this article can be contributed to http://www.knowledgeatwharton.com.cn/ "Will Drug Price Reform Improve China's Health Care System, or Only Mask Symptoms"