This article outlines how to avoid some pitfalls for United States companies transacting business with companies in China. These deals may involve buying, selling, manufacturing, distribution, partnerships, or establishing a branch of your company operations in China. Presented here are a few of the most basic considerations when conducting business with a company based in China.
Initially, compliance with the law is essential to stay out of legal trouble. Some considerations here are strictly legal. The United States and Chinese agencies may have additional regulations governing your proposed transaction. Chinese regulations change far more often than do those in the United States (many times from year to year), so it is particularly imperative that you use due diligence in keeping up with both the current and future legal climate. These varying regulations can cover a myriad of topics, including timing deadlines and tax exemptions.
Contract Translations & Interpretations
In addition to observing current laws, you also want to ensure actions taken over the course of negotiations put you in as favorable a position as possible in the event of future conflict. Initially, make sure proper translation services are used (if necessary). In any negotiation, make sure both sides are fully aware of what they are agreeing to. When both sides speak different languages, translation challenges during negotiations abound. Misinterpretations can be largely avoided using quality translation services. Similarly, it is often important to have a version of your contract in both English and Chinese. You will need both copies to register with the Tax Office, the Commerce Bureau, Customs, and Foreign Exchange Office,.
Foreign Corrupt Practices Act
When doing business in any foreign country, it is helpful to consider the Foreign Corrupt Practices Act (“FCPA”). To summarize, the FCPA states it is illegal for Americans to bribe foreign officials with personal payments or rewards in an effort to obtain or retain business. Punishment for a violation of the FCPA can include significant fines and/or prison time. Gift giving is more customary in business dealings with the Chinese, so consider whether you are in violation of United States law. The key point is you cannot offer a gift to a foreign official or foreign political party (or any person who knows the gift would go to a foreign official or foreign political party) in order to influence their decision making for the purpose of obtaining business, retaining business, or securing some other improper advantage. See 15 U.S.C. § 78(a)(1)(A)(i)-(iii).
Intellectual Property Protection
Before conducting business in China, consider how you will protect your intellectual property (“IP”). One way to do this is file an application with the State Intellectual Property Office of the People’s Republic of China (“SIPO”). China operates a “first-to-file” system, meaning the first one to file an application with the SIPO is granted the IP rights (assuming the application is granted). Thus, IP rights are based on the date of application, not use. Once granted, the applicant is provided with the right to own the respective IP as well as protection from infringement and misuse.
The Chinese legal system does not have the best reputation for protecting contractual and intellectual property rights of United States companies. A law firm (like ours) with a relationship with Chinese attorneys can advise on additional measures to protect your intellectual property, both legally and practically. For example, these might involve use of escrow services, maintaining practical leverage until the Chinese company fully performs under a contract, or legal procedures will be enforced in China.
China Deal Checklist
Here is a quick checklist for United States companies to consider in deals with China:
- Have you ensured your deal complies with both United States and China laws and regulations?
- Have you ensured the contract is accurate in both an English and Chinese version?
- Have you avoided payments or gifts that could be bribes under the United States Foreign Corrupt Practices Act?
- Have you considered how to protect any of your Intellectual Property that is impacted by this deal with China?
- Have you contemplated how you will enforce your legal rights and practical ways to keep leverage until the deal is complete?