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The Legal Services Related to Foreign Investment
Before they come to invest in China, foreign investors are not only concerned with the commercial risks but also the legal risks involved in the investment. Generally speaking, foreign investors have their own lawyers in their country. But because they are not familiar with Chinese law, it is necessary for foreign investors to appoint local lawyers and seek professional opinions for their projects in China.
To ensure effectiveness of investment and avoid any trap, we offer to foreign investors a series of legal services to protect their legal rights and interests.
Form of Ventures
The category of foreign invested enterprises includes equity joint venture, cooperative joint venture and wholly foreign owned enterprise. The equity joint venture is the most commonly used vehicle of investment. Foreign investors have the strengths in capital, technology, management and sales experience, while Chinese partners have the advantages in land use right, employees, sales network and good public relationship. Either side may take advantage of the strengths of the other party. However due to the difference in culture and value, disputes in management and control of power may arise during the cooperation. In some cases two parties may even go into deadlock. For foreign investors who desire to maintain sole control of the enterprise, wholly owned enterprise (WOFE) is a better option. It must be noted that in reality WOFE is not allowed for in some sectors and foreign investors may encounter problems arising out of unfamiliarity with the Chinese situations. In a word, foreign investors shall be fully aware of the advantages and disadvantages of each form of ventures. To achieve this, we may, according to Chinese law and based on our experience, give our legal opinions to foreign clients on selection of the form.
If the foreign investors decide to set up a joint venture, we find, from our experience, that a suitable partner is one of the most critical factors which may affect the success of the venture. We strongly suggest that foreign investors undertake a through due diligence of the potential partner. We may take up instructions to do the investigation of Chinese partner and obtain detailed information in respect of the form of enterprise, registered capital, shareholders, directors, legal representatives, land and factory, employees, creditworthiness and lawsuits involved. If possible we may help foreign investors ascertain whether the potential partner is conducting any competition activities.
To set up a FIE, a lot of paper work shall be done as required by Chinese law. We may assist foreign investors in drafting feasibility reports, contracts, articles of association and other legal documents. Although there is some sample documents available, we find them too brief and general and we suggest that detailed clauses shall be incorporated into the contact and articles of association with respect to organization structure, duties and responsibilities of each organ, voting procedure and remedies available. Foreign investors shall make full use of the freedom of contract so as to prevent the awkward situation, i.e. there is no provision to be applicable when some real disputes arise.
After the venture is established, commercial activities are carried out in the form of contractual arrangements. Sample contracts can standardize management and make enterprises more efficient. To avoid disputes and protect interests of enterprises, we suggest our client to prepare contracts of all kind in the normal business operation, such as employment contract, sales of goods contract, technology transfer agreement, trade mark licensing agreement and lease agreement. Then we will review each of these contracts and make the clauses more favorable to our clients. In addition we may also be instructed by our clients to participate in their board meetings to ensure legality of procedures and resolutions. One of our clients is a well-known Japanese multi-national company, which attaches more importance to review of contracts by lawyers.
Transfer of Shares
In the event of deadlock between the parties and failure to reach agreement through negotiations, one of the escape routes for foreign investors is to transfer its shares in the enterprise. In this case, we may act for our clients to negotiate with the other party, most importantly to help decide a reasonable price of transfer of shares, which can be accepted by both parties. Another work is to draft the agreement in accordance with Chinese law on the transfer of shares related to foreign invested enterprises. We have successfully assisted a Taiwai Company in a share transfer matter in relation to a joint venture company in Zhejiang Province.
If a FIE suffers a great loss, or can not achieve its goal specified in the contract, or experiences a deadlock, and it is impossible to continue the business, the board of directors shall make a unanimous resolution in respect of the early termination of contract and apply for approval to the original approval authority. During the liquidation, the liquidation committee may seek lawyers’ opinions or may appoint lawyers as members of the liquidation committee. We have acted for a French company in an early termination and liquidation of a joint venture enterprise. We gave our legal opinions and drafted all the documents required in the liquidation procedure. If two sides can not call a meeting or reach a unanimous resolution on the early termination due to serious deadlock, foreign investors may instruct lawyers to bring a case to court or submit the dispute to the arbitration commission applying for early termination of the contract. At present we are acting for a Hong Kong company to resolve the deadlock with a Chinese partner.