China Investment Legal 101 for The City of Toronto & CCBC Structures, Contracts, IP & Dispute Resolution Todd Bissett 白思涛 Partner October 31, 2012
Overview/Agenda 1. Background 2. Corporate Structures 3. Contracts 4. IP Protection 5. Dispute Resolution 6. Summary It s a big (and complex) world out there Don t be the 井底之蛙
Background Who am I and what do I do? Why am I here today? Do I mind if you interrupt me?
Corporate Structures Corporate Structure Topics: Entity Types Industry Classifications Cross-Border Structures standard restricted industry
Corporate Structures Types of Entities Chinese regulations provide 4 types of permitted foreign invested enterprises ( FIEs ) Representative Office Wholly Foreign Owned Enterprise Equity Joint Venture Cooperative Joint Venture Just a few differences vs. Canada (& elsewhere): Registered Capital (i.e., no shares ) Total Investment Amount Business Scope Formation process and ongoing supervision Exit problems transfers of equity & M&A Rules
Corporate Structures Industry Classification All industries in China are categorized as: Prohibited no foreign investment permitted at all, even joint ventures and minority ownership. Restricted limited FDI permitted, generally only minority and without substantial control. Encouraged 100% foreign ownership possible and encouraged through incentives. Permitted 100% foreign ownership possible but no special incentives. This is the catch-all category.
Corporate Structures Offshore Structures Most Foreigners Use Offshore HoldCos. Why? PRC Transfer Restrictions Tax Advantages Exit Flexibility Compartmentalize Liabilities Here is a typical preferred structure: Parent Company Offshore SPV WFOE/JV Offshore China
Corporate Structures Restricted Industries Captive Company Structure Foreign investor invests in an onshore WFOE/JV through a typical SPV; but the WFOE/JV does not operate the business (no Business License). Instead, a domestic PRC company is formed to obtain the license and operate the business. The PRC company is controlled, not owned, by the WFOE/JV uses contractual arrangements (the dotted lines below). Offshore SPV Nominee Offshore China WFOE/JV Domestic OpCo
Contracts Contracts Topics: First Principles PRC Contract Law & Drafting Cultural Differences
Contracts First Principles: Nature & Jurisdiction of Parties Are counterparties domestic PRC entities or foreigninvested enterprises ( FIEs )? Are you contracting through your own PRC entity or directly from offshore? Characteristic of Business Arrangement Deals have personalities what is yours? Current Legal & Regulatory Environment Consider general & specific constraints Constantly changing
Contracts PRC Contract Law & Drafting: General principles will be familiar, though with variations No consideration required for a binding contract Public Interest exceptions Ancillary terms become key Language Governing Law & Dispute Resolution Limitations on Liability Specific Performance
Contracts Cultural Differences: Guanxi Contract Drafting/Ambiguity Negotiation Style Post-Deal Negotiation Chinese Names Challenge ( 老百姓 )
Intellectual Property Protection IP Protection Topics: Legal Regime & Implications Recommendations
Intellectual Property Protection PRC Legal Regime & Implications: First-class laws & regulations China is party to all primary international IP treaties And under PRC law int l treaties take precedence Specialized courts & governmental agencies Registration, licensing, int l best practices now common Corruption generally not a problem Enforcement options (Courts, Gov t, Criminal, Customs) BUT Enormous Volume!!!
Intellectual Property Protection Recommendations: Register IP before entering the Chinese market China is a first-to-file jurisdiction Establish systems & procedures to physically protect IP: Literally lock down IP Limit employee access Maximize protection for easily replicable IP Build business plan around assumption of infringement Guanxi
Dispute Resolution Dispute Resolution Topics: Legal Systems: Important Canada/U.S. vs. China Differences Primary Choices to Make Primary Factors Influencing Choices Common Examples
Dispute Resolution Important Systemic Differences: Common Law vs. Civil Law Language Depth & Consistency of Professionals Predictability matters. Corruption & Political Influence just kidding!
Dispute Resolution Three Primary Choices: Chinese Governing Law; or Non-Chinese Governing Law Litigation; or Arbitration As long as a dispute has at least one non-chinese party, all of these options are on the table. Resolution in China; or Resolution outside of China
Dispute Resolution Three Primary Factors: Enforceability non-prc court awards Remedies non-$ arbitral awards Cost & Convenience absolute & relative terms Bonus Factor (and often the decider): What your counterparty will accept.
Dispute Resolution Most Common Examples: Hong Kong Arbitration & New York Law Other jurisdictions: Singapore; Tokyo; Hawaii PRC or other laws possible CIETAC Arbitration & PRC Law NY or other law is possible PRC Courts & PRC Law Hybrid Structures
Any Questions? Thank You Todd Bissett 白思涛 519-747-6161 tgbissett@blg.com