China is a massive marketplace, teeming with talent and a potential goldmine for investors and entrepreneurs. It’s little surprise so many startups set up shop in Shanghai, Beijing, Guangzhou or other cities so quickly. But in the rush to establish a foothold, many western business people are falling foul of China’s legal system, which can be difficult to grasp. And as the convictions this month of a British-American couple for their part in a GlaxoSmithKline corruption scandal show, it is never a good idea to mess with Chinese law.
“People think they can go into China and it has no laws,” says Dan Harris, an expert in Chinese law with Harris Moure. “That couldn’t be less true. China is a nanny state, and there are a lot more rules and regulations than there are in the United States. We have this view that China’s lawless and we can get away with things, and we often base it on the fact that Chinese companies do the same thing. But what we don’t realize is that laws may be the same for Chinese and foreign companies, but enforcement will not be.”
Harris has a huge back-catalog of catastrophe and financial loss from those who rushed into China too fast. And, he says, the worst victims are often in technology:.“The only two times anyone’s cried in my office, both were tech companies,” he says. Red Herring presents five Chinese laws you really should know.
The legal representative of a company gets to make decisions.
If a Chinese joint venture partner hires the legal rep, says Harris, it doesn’t matter whether you have the majority stake, or if you’re on the board. The legal rep still has the power. “Your Chinese partner can go to the bank and take out $2 million without your say,” he adds.
There is no such thing as an independent contractor in China
“I had a company of 15 people who signed a contract to develop an app for three years,” says Harris. “Then when the app was developed the Chinese refused to pay and told them to get out.”
The majority shareholder of a firm has to have been at the company for three years before an IPO can be made
It has occurred before when Chinese companies were about to initiate an IPO when the majority shareholder has died, meaning that the move has to be sent back to the drawing board. “China doesn’t like these super-fast IPOs like the U.S. does,” adds Harris.
A U.S. court ruling holds no truck in China
“Sometimes Americans will fight Chinese to have a dispute settled in a U.S. court, then the Chinese will battle them, putting up the illusion they care,” says Harris. “Then the American court will favor the American company. But a U.S. court ruling has no jurisdiction in China whatsoever.”
Do not terminate employees as if you are in the U.S.
In the States a company can hire and fire at will, often for no reason at all without transgressing discrimination laws. In China an employee may be fired without notice or severance pay only if he or she has severely violated company rules; engaged in dereliction of duty or corruption that dents the employer; made business ties with another company; or is facing criminal investigations. Other reasons, which carry notice and severance, include an inability to perform following a statutory treatment period, and incompetence not remedied by relocation or training (which Harris highly recommends not to follow). Firing twenty employees, or more than 10% of the workforce, carries additional stipulations. “Americans are used to just firing people,” says Harris. “It doesn’t work that way in China.”