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Avoiding Disputes in China

Doing Business in China: Opportunities and Challenges December 8, 2005 Atlanta Presented by: Jeffrey Li McKenna Long & Aldridge LLP Washington, DC. Avoiding Disputes in China. www.mckennalong.com. big city. country. Basic Facts. 1.3 billion population consumer labor supply

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Avoiding Disputes in China

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  1. Doing Business in China: Opportunities and Challenges December 8, 2005 Atlanta Presented by: Jeffrey Li McKenna Long & Aldridge LLP Washington, DC Avoiding Disputes in China www.mckennalong.com

  2. big city

  3. country

  4. Basic Facts • 1.3 billion population • consumer • labor supply • average 8% annual grow of economy in past 20 years; • 3rd largest GDP in the world • after U.S. and EU • 3rd largest FDI destination • after U.S. and U.K.; • 3rd largest trading country: • after U.S. and Germany; • Modern commercial laws and legal system established in early 80s; • Many business risks in China; • Can not afford to miss it;

  5. Doing Business in/with China • Foreign Direct Investment in China • Total: $600 billion. • 2004:$61billion. • 450 of Fortune 500 companies. • International Trade--China • Overall: • 2004: $1154 billion; Jan-Sept, 2005: $1024 billion ($546 b export; $478 b import)

  6. Doing Business in/with China(cont’d) • China and U.S. • 1-9, 2005: export $176 billion ($132.5 billion-CN) to U.S.; import $29.8 billion ($ 39.8 billion-CN) from U.S. • U.S.-- largest single country of export market for China and 3rd largest single country which China buys from—after Japan and Korea; (2004) • China– 5th largest export market for U.S. and 3rd largest import market for U.S.—after Canada and EU (2004) • Intellectual Property Right Transfer or Licensing • in trade • in FDI

  7. Disputes (I) • Investment in China • Disputes with Chinese partners in joint venture relationship: • contribution in cash; IP; land; equipment; distribution channel; • control of board, management, operation; expenses (expat vocation and salary), expand business/increase capital (decision making process); • other agreements between China partner and U.S. investor or JV company

  8. Disputes (II) • technology transfer/license, development, service, royalty fee, trademark, products purchase/prices, non-competition • Dispute with Chinese government agents • Administrative decision, orders, fee, fines, tariff and taxes; • International Trade • sourcing or exporting • quantity, quality, delivery time, inspection, costs, currency inflation, payment • Sales or Distribution in China • payment;

  9. Disputes (III) • re-negotiation after agreements are signed • less respect shown to contracts; • some lack of concept of legal consequence; • difficult to enforce civil judgment; • political issue—stability of the society/unemployment; • 15 days jail maxmium; • difficult to prosecute contract fraud due to lack of manpower in law enforcement • concern over being “ripped off” by westerns, particularly IP transfer/license or other intangible service (engineering, legal or consulting); • hard to agree on values;

  10. Dispute Avoidance (I) • Investment in China—suggestions: • avoid joint venture; prefer wholly foreign owned enterprise (WFOE); • very detailed negotiation and agreements; • nothing is too small • choose arbitration in big cities as dispute resolutions to avoid local protectionism; • local counsel (start w/ MLA) • control drafting and amendments

  11. Dispute Avoidance (II) • good records on meeting minutes • build good relationship with local government or higher level government; • never dispute with or sue government—higher level review; • help solve disputes with Chinese partners • build good and strong personal relationship to top management—LEADERS (SOE) • good interpreter—no misunderstanding • communication in Chinese (and English)

  12. Dispute Avoidance (III) • Trade or sell products in China • due diligence; • limited or no public information and hard to obtain; • SAIC • registered capital contribution, shareholders; • annual financial statement; • sometime not reliable; • visit the company and check facility; • use local counsel; • use big state owned trading company as an agent for first couple deals (international trade) • very careful of giving credit

  13. Dispute Avoidance (IV) • detailed agreements are preferred (avoid one page P/O) • quantity, quality, delivery terms, currency, etc • key: inspection agent and term of payment • a familiar/comfortable inspection agent • L/C for seller and D/P __days for buyer; • good record keeping • email, fax, delivery and shipping documents • authority level in the Chinese company • company seal • personal signature • legal representative on B/L • other managers or employees • both

  14. Dispute Avoidance Measures (V) • select courts or arbitration organization in big cities • Shanghai, Beijing or Shenzhen; • relationship is very important • with top management of Chinese company; • with local and higher level government; • sometimes more than the contracts;

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