Understanding the differences between the Chinese and International business law

Interview with George Ge
Attorney-at-law at Shanghai Fangben Law Office

George focuses on helping foreign and domestic clients investing in China in a variety of industries, such as manufacturing, service and trading businesses. He also serves his clients, big-size corporations or start-ups, in stakeholder arrangement documents, HR matters, intellectual property rights (“IPRs”) (such as brands, patents, software) and other daily legal consultation.

Hubbers conducted an interview with him about how to get started with a new business in China, IPRs, what documents are required and how long everything takes:

1. What type of work has to be completed from the legal point of view to establish a successful business in China?

There are many tasks to be done, ranging from taking care of a lawfully established company in compliance with the local law to registering/protecting the IPRs in the Chinese market:
A, You have to choose what form you are operating your business in China, usually a limited liability company with foreign shareholder(s), either a WFOE or a JV.

B, In case you have shareholder partner(s), we help you to formulate a suitable JV contract consistent with the local law to govern the shareholding/partnership relationship. You also have to ensure that you protect your interests, e.g., who controls the company, how to protect all shareholders (especially minority shareholders), who to own the IPRs, how to deal with deadlock, and how to exit.

C, Plan your IPRs layout in China (and also abroad where necessary) in advance; apply for registration of such IPRs, e.g., patents, and trademarks. Starting the application process is just legal drafting and admin work but obtaining the grant of IPRs takes time. The sooner you start it, the better.

D, Get advised on what Chinese trade name (to be registered when forming your company) you are going to use for your business on the Chinese market. This process helps to avoid infringement claims as well as ensures your brand name fits the local market (branding and marketing purposes).

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2. What are the country-specific steps that your IPRs have to acknowledge?

Copyrights operate without borders; that means, that once you've created your work, and you have the copyright, you have it for the whole world. Where necessary, we advise you to register earlier such copyright for the convenience of proof at court. But unlike copyrights, patents and trademarks have borders for each jurisdiction and have to be done in each jurisdiction where you want to operate. If you've registered your trademark in The United Kingdom, you still have to do it in China separately. If you don't register your Trademark in China, the Chinese law won't protect it.

It is vital that you start (even better if you finish) these procedures before launching a product because the whole process takes over a year (in case of a new product invention it may take even longer).

3. What are the challenges and threats?

  • You have to pay attention to the very first agreement with your partners.
  • Ensure you know how you would handle a potential dispute with them and you include everything in the written agreement. Do not leave anything to goodwill, trust or assumptions.
  • In the same time, give yourself and your partner some space for adjustments. Make things flexible and open where it is possible.
  • IP protection is not as strong in China as it is in the Western world. For this reason, before you enter the China market, you should lay out your IPR plan and look at all parts in advance.
  • Get local advice: China works very differently to the Western world. It is not enough to understand international law and practices and assume all will be the same in China as well.
  • China has an open market, but not as open as Western markets, ensure you know the restrictions and limitations.
  • Get a license (permit or filing) for your product if required by law when or after you set up a product. If the law requires a license, you can't simply start bringing products to China and trying to sell them on the market without necessary and proper registration.
  • For setup of a foreign-invested enterprise, it is vital to pay attention to which industry your business belongs to. You need to refer to the "Catalogue of Industries for Guiding Foreign Investment (2017 Revision, updated at times)", and ensure your service/product is not prohibited or restricted by local regulations.
  • For operating a business in China, you will be an employer. You shall be very careful to HR matters as China do value social stability. It is much more difficult in China to get rid of an employee, while you are advised to establish a perfect and legalized HR system to take care of employer-employee relationships (including termination of a labor contract).

4. Is there any substantial difference between China versus overseas when it comes to the registration process?

In China, operating a business is not that flexible. For example, you have to register your business scope when forming an entity. You are forbidden to do any business outside of your business scope. If you want to change your scope in China, you have to apply for adjustments and go through the process all over again. In Western countries, this scope is much broader and more flexible. For example, in the UK, companies are no longer required to have a multi-page business scope. They can conduct their business very broadly.

5. Do you have some recommendations to our Hubbers inventors?

It is essential that inventors recognize that China is different. If you want to bring your brand to China or create something here, check reality first. Ensure you don’t ask associates and friends to do any of the registrations under a different company but always do it for yourself. Hire a local lawyer and go through the legal process. This simple advice will help you to avoid a lot of headaches later.

George is a lawyer and expert of Chinese law, especially foreign direct investment, M&A, intellectual property law, and commercial contract law, labor law in China.

Hubbers Team

Hubbers Team

Shanghai