Transcript Arbitrating in China - Association of Corporate Counsel

Sixth Annual
In-House Counsel Conference
Panel 2
Interactive Strategies for Doing
Business in China
Presenters
 Frances Chou, President and General Counsel,
Schechter + Chou
 Robert Hart, Senior Corporate Counsel,
Harman International Industries, Inc.
 Kimberley Chen Nobles, Partner,
Crowell & Moring LLP
 Andrew Pan, Chief Representative & Managing
Director, North American Representative Office
of Shenzhen, P.R. China (NAROS)
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China’s Market Under Global
Slowdown
Update and Opportunities
Andrew Pan
3
Overview
 China’s Economy Under Global Economic
Slowdown
 China’s Economic Stimulus Package
 Opportunities by Industry Sectors
 Recent Development
4
China’s Economy Under Global
Economic Slowdown
 GDP growth statistics
 9% in 2008
 2008 in Quarters
 10.6% (Q1)
 10.1% (Q2)
 9.0% (Q3)
 6.8% (Q4)
 2009 in Quarters
 6.1% (Q1)
 7.9% (Q2)
 8.9% (Q3)
 2009 target: 8%
Source: National Bureau of Statistics of China
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China’s Economy Under Global
Economic Slowdown (cont.)
 Export decline
 Export declined 19.7% in Q1, 2009
 Export volume decreased from $111.4 billion
(Jul 2008) to $51.3 billion (Jan 2009)
 FDI decline
 FDI flows declined 20.6% in Q1, 2009
 Unemployment rate increase
 Raised 2009 target to 4.6%, the highest since
1980
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China’s Economy Under Global
Economic Slowdown
 Stock market,
housing market,
auto market and
other key
economic
figures were all
down sharply
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China’s Stimulus Package
 Announced Nov. 9, 2008, projects and
spending already started in 2008
 4 trillion RMB ($586 billion USD) stimulus
package for government investment in
infrastructure, tax deductions and subsidies, to
stimulate domestic spending
 2 years, 10 major areas:
 Finance, housing, rural infrastructure, transportation,
industry, health and education, disaster rebuilding,
environmental protection, technology innovation, and
tax reform
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Opportunities by Industry
Sectors
 Finance
 Removing lending quota on commercial banks
 Increasing the lending scale
 Credit support to M&A
 Credit support to rural areas
 Credit support to small and medium enterprises
 Tax (VAT) reform
 120 billion RMB tax reduction from January 1st, 2009
 Export VAT refund rate increases to help exporters,
applicable to 3,770 products
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Opportunities by Industry
Sectors
 Housing
 Tax reduction to boost real estate market
 Affordable and low-rent housing
 Expanding the pilot program to rebuild rural housing
 Increasing senior housing
 Rural infrastructure/modernization
 Improving countryside roads and power grids
 Ensuring drinking water safety
 Expediting the North-South Water Diversion Project and
country-wide reservoirs
 Rural Home Appliance Subsidies Program
10
Opportunities by Industry
Sectors
 Transportation
 Budget: 1.8 trillion RMB
 Building more dedicated passenger railways and coal
routes
 Expanding highway system
 Building more airports in the western areas
 Automobile
 Tax reduction for purchasing economic cars less than
1.6L
 Subsidies to farmers for purchasing light trucks and
minivans
 10 billion RMB to subsidize auto industry technological
innovation and new energy vehicles
 Expanding auto financing
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Opportunities by Industry
Sectors
 Telecom
 Long awaited 3G licenses issued to China Mobile (TD-
SCDMA), China Telecom (CDMA2000) and China Unicom
(WCDMA)
 Will spend 170 billion RMB in 2009, and 400 billion RMB
by 2011 on 3G network
 Could lead to US $290 billion in private-sector
investment by 2011
 Target: 50 million subscribers by 2011, covering all cities
and bigger townships
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Opportunities by Industry
Sectors
 Healthcare and education
 Improving health and medical systems in rural areas
 Restructuring the healthcare system
 Building more joint-venture hospitals
 Expanding health insurance, especially to rural areas
 Developing cultural and educational sectors in rural
areas
 Building more schools in rural western and central areas
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Opportunities by Industry
Sectors
 Energy and environment
 Budget: 350 billion RMB
 Technology upgrade of coal-burning power plants
to reduce pollution
 Encouraging investment in renewable energy such
as nuclear, wind, solar, and biomass
 Encouraging energy conservation, and improving
energy efficiency
 Clean Development Mechanism (CDM) projects –
greenhouse gases reduction projects
 Waste management
 Eco-city plan
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Opportunities by Industry
Sectors
 Other industry sectors
 Sichuan earthquake rebuilding: 1 trillion RMB
 Technology innovation
 E-commerce
 Entertainment, animation, media and
advertising
 Logistics
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Recent Development
 Challenges:
 Global/U.S. economic slowdown lasting can cause
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China’s economic growth sluggish and market (most
sectors) downsize continuously
Is 4 trillion RMB enough?
Saving vs. spending
Government spending vs. consumer spending
Over liquidity/inflation concern
Banking trouble again: non-performing loans may rise
Currency and trade disputes between the U.S. and China
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Recent Development
 Q4/2009 GDP growth: >9% (estimated), 2009
GDP growth: 8% (almost confirmed), 2010 GDP
growth: >8% (estimated)
 China’s economy V-shaped recovery confirmed
 Transformation of growth pattern
 Before: excess consumption of natural resources;
environmental pollution; too much dependable on
investment and export; insufficient domestic
consumption
 Aim: more balanced, sustainable and steady growth with
a better skilled work force and technological innovation;
boost domestic consumption
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Key Business Issues
Frances Chou
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Key Business Issues
 Initial research
 Unexpected costs and expenses
 Labor related issues
 Relationship, Relationship, Relationship!
 Due diligence
 Lost in translation
 Opportunities
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Initial Research
 Permits, licenses, approvals, . . . .
 What kinds
 From which agencies
 Fees, costs, expenses, . . . .
 Market research
 The Chinese market is extremely regional
 Understand where you will fit in
 Adjustment of Products
 Government policies
 Relevant US and Chinese laws
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Unexpected Costs and
Expenses
 Permits, licenses, approvals, . . . .
 IPR issues
 Government incentives and expiration of such
incentives
 Other start up costs
 Currency conversion issues
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Labor Related Issues
 Hiring and retaining skilled employees in china
 Employment agreements
 Insurance
 Training
 Firing employees
22
Relationship, Relationship,
Relationship!
 Understand how “Relationship” works in China
 Government relationship
 Relationship with the “Right People”
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Due Diligence
 The most important thing
 Government filings and documents
 Corporate documentation
 Financial information
 References
 Site visit
 Background check of executives
24
Lost in Translation
 Different business cultures
 100 ways to say “NO,” but 90 of them sound
like a “YES” to a foreigner
 Read between the lines
 What does a “contract” mean to Chinese?
25
Opportunities
 Selling into the China market
 Sourcing and outsourcing
 Selling/licensing technologies to Chinese
companies
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Conclusion
 Initial research
 Understand the differences
 Find competent assistance
 Due diligence
27
Key Legal Issues and Business
Approaches
Robert Hart
Kimberley Chen Nobles
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Overview
 Economic and trade trends
 Growing importance of IP assets in
information-based economy
 Key law changes and legal issues
 Outsourcing – Export Control regulations and
issues
 New opportunities with associated risks
 Red flags and what to do about them
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Introduction
 Economic and trade trends
 Globalization of markets and manufacturing
bases
 China’s role and position
 Growing importance of IP assets in
information-based economy
 Market value of business increasingly based on
IP assets
 Outsourcing
 Trends
 Models
 Issues
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Current Business Climate
 Skyrocketing Production
Costs*:
 Management compensation + 9.1 %
 Support staff wages
 Blue collar wages
 Raw materials
+10.3 %
+ 7.6 %
+ 7.1 %
 Continued increase in
production costs in
2009/2010
* 2008 Booz Allen Hamilton & American Chamber of Commerce data.
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2010-2020?
 Foreign currency reserves:
 $1.4 Trillion (2007)
 $2.3 Trillion (2009)
 Purchasing raw materials on a worldwide scale
 Time compression due to Growth:
 1 year in China =
 ~ 2.8 years in U.S.
 ~ 5.6 years in Ireland
 ~ 5.8 years in U.K.
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New Market Opportunities
 Key technology sectors:
 Biotech and pharmaceutical
 Agricultural chemicals
 Software
 Satellite broadcasting encryption technology
 Computer, video games
 Raw materials
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Business & Governmental
Policies
 How understanding and utilizing key business,
government policy and legal issues can work
for you
 Create new market and exploitation
opportunities
 International trade agreements are raising the
standards for protection and enforcement of
IPR
 International rules and policies create risks as
well
 Compulsory licensing of patents
 WTO-sanctioned retaliation
 Other policy tools
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Recent Legislation
Legislation
Issuance Date
Effective Date
Significance
Property Rights Law
3/16/2007
10/1/2007
First time recognition of
legal protection of
PRIVATE and public
property
Enterprise Tax Law
3/16/2007
1/1/2008
Phasing out of favorable
tax treatment for foreign
investors, tax holidays,
etc.
Labor Contract Law
6/29/2007
1/1/2008
Implementing
Regulations
--
9/18/2008
Provides greater
protection for employees
making it harder to
terminate employees, lots
of compliance issues
Anti-Monopoly Law
8/30/2007
8/1/2008
Expands scope of
prohibited activities that
affect business and
commercial trade
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Key Legal Issues
 IP and ownership issues
 Export controls
 U.S. Foreign Corrupt Practices Act (FCPA) &
China’s Anti-commercial Bribery Rule of 1996 –
“1996 Rule”
 Mandatory hiring/contracting and in-country
labor laws
 Local content laws
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Intellectual Property Rights
 Proactive exploitation and protection is
essential in today’s global marketplace
 Key premises:
 Intellectual property rights are a private right
 Intellectual property rights are generally
territorial
 In order to protect and enforce in any country,
must obtain IPR in that country
 Best way to ensure protection of IP asset:
know and comply with the local rules
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Intellectual Property Rights
 Exploit IP asset in strategic manner
 Be proactive even if currently a potential market
 Utilize international treaties which make it
possible to file/register in several countries
 Patent Cooperation Treaty
E.g., Parties include Japan, China, Taiwan, Korea,
Malaysia, United States
 Madrid Protocol (Trademarks)
 E.g., Japan, China, Korea, Singapore, United States

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Intellectual Property Rights
 Exploit IP Asset in Strategic Manner - cont’d
 Contractual approach – IP Licenses
 Obtain necessary licenses before sharing data
 Know and comply with local laws
 Business approaches
 Form joint ventures instead of licensing
 Split production processes
 Control Through vertical distribution chain
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Contracts
 American contract attributes:
 Long
 Detailed and tight
 Legalese does not often translate
 Use Modern Format - no whereas clauses, delete the words
“said” and “hereto” as used in “said parties hereto,” etc.
 “AS WITNESS, the parties hereto have caused this Agreement
to be signed on the date first written above.”
 Large Chinese companies are experienced with
U.S. style contracts versus midsized Chinese
companies with little, but increasing experience
 Boilerplate language often a stumbling point
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Signing Ceremonies
 Informalities in the U.S.
 Mail contracts and sign at leisure
 Ceremonies are a waste of time and money
 Major agreements with Chinese partner:
 Expect top executives to meet and sign
 Often followed by dinner, drinking and karaoke
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Dispute Resolution
 Dispute resolution options:
 Ad hoc rules
 Administered mediation – not enforceable
 Litigation
 Adjudication of cases in rural areas is primitive with
protectionist influences
 May be impossible to enforce outside of China
 Arbitration
 Preferred in business disputes, has confidentiality unlike
courts and IS enforceable under the New York
Convention signatories
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Arbitration
 Choosing an arbitration venue
 Chapter 14 of the MOFCOM Chinese Handbook
used to say:
 Day # 1: Insist on arbitrating in China
 Day # 2: If the foreigner still wants to arbitrate
outside China, continue to argue the benefits of
arbitrating inside China
 Day # 3 – 14: Repeat Day #2
 Day # 14: Suggest Stockholm, Sweden
 Insist on Hong Kong and Singapore
 These cities have better Chinese restaurants than
Stockholm
 Stockholm winters are dark and cold
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Arbitration Administration
 CIETAC – established in the 1950s, monopoly
over international matters
 Local arbitration commissions (over 180 in
number) – domestic disputes
 When regional commissions were allowed to
hear international disputes, CIETAC lobbied for
local disputes, thus CIETAC is now the busiest
arbitration group
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Arbitrating in China
– ad hoc arbitration?
 Supreme People’s Court has struck down
domestic ad hoc arbitration clauses - People’s
Insurance Company of China, Guangdong
Branch v. Guanghope Power et al [Min Si
Zhang Zi No 29]
 Supreme People’s Court (2004) - Prohibit ad
hoc arbitration agreements, EXCEPT:
1. where all the parties are from New York
Convention States; and
2. local laws do not prohibit ad hoc arbitration
 Are ICC arbitrations permitted in China?
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Drafting Effective Arbitration
Clauses
 Requirements for valid arbitration agreements:
 Must be in writing
 Designate an arbitration commission
 “If a dispute arises, submit to arbitration by
CIETAC or by the People’s Court”
 Unenforceable
 Can’t have an alternative in the provision, drafter
must choose forum
 “ARBITRATION INSTITUTION” are MAGIC
WORDS
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Combating Global Infringement
 Requires multi-faceted strategy
 Establish IP management and anti-infringement
measures for business operations
 Utilize all available domestic legal remedies
 U.S. enforcement laws
 U.S. Government and international trade policy
initiative tools
47
Combating Global Infringement
 IP management and anti-infringement
measures for business operation
 Management structure
 Contracts/agreements
 Education
 Operational procedures
 Monitoring of operations
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Conclusion
 Exploiting and protecting rights and assets in
doing business with China
 Global marketplace and international trade
Developments create opportunities AND risks
 Need knowledge of international trade
obligations, policy tools, business and legal
rights to effectively navigate
 Proactive exploitation and protection is essential
 Develop multi-faceted strategy utilizing legal,
business and government-assisted approaches
 THINK GLOBAL / ACT LOCAL
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QUESTIONS?
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Contact Information
 Frances Chou, Schechter + Chou, Inc.
 310-479-8600
 Robert Hart, Harman International Industries,
Inc.
 (949) 337-0568, [email protected]
 Kimberley Chen Nobles, Crowell & Moring LLP
 949-798-1330, [email protected]
 Andrew Pan, North American Representative
Office of Shenzhen, P.R. China (NAROS)
 213-628-9888, [email protected]
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