BizChina

In June of this year, China enacted a new Food Safety Law. It is stating the obvious to say that China's food safety is of relevance to the entire world and China food safety is the rare case where both foreign and domestic interests are united in wanting to solve a major problem within the Chinese system.

China's new food safety law takes the position that the food safety problem arises from inadequate central control and from a lack of clear standards and procedures. However, even if this were true, the measures adopted in the Law will not resolve these issues.

The Law created a Beijing based coordinating council called the National Food Safety Commission to coordinate five national level ministries that have day-to-day control over different phases of the food production process. Since the Law does not set out the structure or authority of the new Commission there is no reason to expect this approach will improve central control of the food safety problem. It does little more than create another layer of bureaucracy.

The new Law mandates additional rule-making to regulate every phase of the food production process, a complete review and assessment of current food safety issues, national standards for food quality and safety, and a unified national program for addressing food safety emergencies.

But the Law provides absolutely no details about any element of this program. There are no standards, no time-line, no budget, no procedure for obtaining the input of regulated parties and no procedure for resolution of disputes. It is not uncommon in China for laws to be adopted on controversial topics that leave nearly all of the details to later regulation. The usual result in China is that such regulations never appear, rendering the law essentially meaningless. That has so far been the fate of the standards and procedures portion of the Food Safety Law.

However, even if these difficult issues were to be resolved, the Law will not resolve the food safety problem in China.

Food safety cannot be enforced through government supervision and administrative sanction. Food safety standards function only where there is an effective system of private civil litigation that allows injured parties to take action independent of the government. As with most countries, China simply does not have the funding or expertise to hire qualified inspectors and regulators to enforce to the food safety system. China has over 200,000,000 farmers and over 500,000 food production companies. Its food production system is too vast to allow for meaningful inspection at all stages of the food production process.

The government can play an important role in setting the proper standard, but only when Chinese citizens can use China's court system to obtain damages will China's food safety likely markedly improve. China's tort law system is undeveloped and regulators strongly discourage its use in safety and health related matters.

The Food Safety Law is also not directed at the real problem. In a fundamental sense, China did not need a completely new set of standards and procedures. The previous standards would have been perfectly adequate had they only been enforced.

Chinese farmers and herders are poor and uneducated. Most operate at a loss and only survive by supplementing their income through nonagricultural activities. The same is true of most food processors, who sell into a partially price controlled market and who are frequently on the verge of bankruptcy. These people and businesses do not believe they have the luxury of being concerned with standards and rules and procedures. They make decisions based on day-to-day survival. They will, therefore, take many actions in violation of the law if they believe doing so will give them some financial benefit. They do not worry about the long term impacts. They are only concerned with survival today. In this situation, which is prevalent all over China, no amount of regulation and supervision will have any impact. They ignored the old and simple rules and we can expect the new rules will receive equal treatment.

Having said all this, there is one thing that does seem to be working with respect to China's food safety, at least on the high end and at least in the bigger cities. China's consumers are concerned about the safety of their food and they are hyper vigilant on this score. The food companies know this and they have stepped up their quality control monitoring and they are not shy about getting this word out.

What are you seeing out there?

China's Labor Contract Law (which law applies to every employment relationship in China) is very clear: employers must pay their employees for overtime.

Though there are some exceptions, these exceptions are not nearly as broad or as easy to obtain as is widely believed.

Overtime payments are 150 percent for each overtime hour worked on a normal work day, 200 percent for each overtime hour worked on a day off, and 300 percent for each overtime hour worked on a statutory holiday. China considers forty hours per week as generally considered standard.

Though high level management and other staff can be considered exempt from overtime pay, to be so, prior government approval is typically required. To make matters even more complicated, local regulations definitely can vary on what constitutes an exempt employee and what is required by way of approval.

My firm has handled around a half a dozen cases where foreign companies came to us after having been sued for having failed to pay overtime. In every single instance, our advice and eventual action was to settle the claims because they were all valid. Interestingly, despite all of them having been valid, we were able to settle them for considerably less than full value because the employees were so desirous of getting a lump sum payment and fast.

I thought of these cases today after a reader sent me a China Daily article entitled, "Labor Disputes Skyrocket in Beijing." The article talks about how "about 80,000 [Beijing] workers had been involved in disputes with their employers by the end of November, double the number of last year" and up from 26,000 disputes in 2007. The article then noted how "about 50 percent of the cases were related to overtime rates and payment" and the reader asked me if I had been seeing the same thing elsewhere in China with respect to foreign employers.

My answer was, "Yes." Employees and ex-employees are suing their foreign employers in China way more now than just a few years ago and most of those lawsuits are stemming from a failure to pay overtime, a failure to pay sufficient wages without a written contract, or from a termination not provided for in the employee manual. We are finding these cases very easy to settle at a fairly reasonable cost, but virtually all of these could have been avoided with just basic care. There is no excuse for not paying overtime or not securing an exemption for your employees to whom you believe overtime is not necessary. There is also no excuse for not having a written contract with your employees or a written employment manual setting out the grounds for firing.

Oh, and if you think the person you are paying is an independent contractor and not an employee, there is about a 99.9% chance you are wrong and that person is, in fact, an employee.

What are you seeing out there?

Just got this email, which is not too dissimilar from other emails and phone calls I have previously received:

Like I said before, I'm really enjoying your series on China Law Blog on starting a business in China. It's something I might try myself someday.

I'd be really interested in hearing about a foreigner starting a local Chinese company through a Chinese spouse. I know this is fairly common (I know of several people who have done it this way), but I'm curious about the details. I hear the registered capital must be of a certain amount, or else it doesn't make sense for the Chinese company to "hire" the foreigner to run the business. And, of course, there are also visa considerations. Then, I guess there's the ugly possibility of what divorce means to the company... but I think that's pretty clear. (If partnerships become possible in the future, will foreign management hires be able to become full partners in this kind of business?)

I'd really love to see a blog post on this angle. Please keep my request anonymous, though... no need to make my employer nervous! :)

Great questions.

Earlier this year, we wrote on what we call the fake China joint venture, which is really nothing more than someone wanting to set up an illegal business arrangement as a way of avoiding the fees and costs involved in forming a real joint venture or Wholly Foreign Owned Entity (WFOE). In that post, we talked about the following as a typical situation:

Caller: I've got this great website and it is exactly what China wants/needs. And I've been working on developing it with some Chinese tech friends of mine and we want to take it legal so we can start getting VC (venture capital) funding for it. Here's our plan. Now I know that the old/truly legal/expected/usual way to do this is for me to form my own company and then form a joint venture with my Chinese partners, but I also know that will cost a lot of money. So our plan is for the Chinese company to own the website and then we will have an oral agreement (or a written agreement) that I really own half of it.

Me: Listen, my firm has been contacted at least twenty times after these situations have gone bad and I am aware of at least another twenty times where the same thing has happened, and let me tell you, these arrangements (it is NOT proper to call these joint ventures) virtually always end the same way. They end with the Chinese company booting you out completely and leaving you with no recourse. Protecting foreign companies in legitimate joint ventures is difficult enough, but it is pretty much impossible under the scenario you are describing. We had a guy who paid us a lot of money once for us to do everything we could to try to get "his" multi-million dollar business back. Guess what, we could not even come close to getting it back. Every Chinese lawyer we talked to about suing to get it back told us we had no chance of winning at all. I mean, just listen to the argument we would need to make to the judge:

Your honor, my client knew that China's laws are very clear on what foreign companies must do to operate legally in China, but he thought these very clear laws should not apply to him because, well because he is an American tech company and he was just too smart/too poor to bother to comply with the very clear laws. So instead, he had this great method for completely circumventing China's very clear laws. His idea was to not form a company, but rather, have his Chinese friends form the company and he would have a little side deal with that company. Well, that side deal has now gone bad and my client wants you to go against China's very clear public policy on how foreign business is to be done in China and enforce this unwritten side deal.

What do you think of that argument?

Caller: (long pause) I understand things could go wrong with that kind of arrangement, but would you be willing to draft the contract between me and the Chinese company?

Me: No. I can't do that. I can't draft a contract that I know will never work. I just can't. Give me a call if you ever want to do this legally, in a way where you actually have a chance of profiting from your work down the road.

We then referred readers to the following:

For more on this, check out "China SMEs, Own If You Want To Own." To get a feel for how difficult it can be even with a fully legal joint venture, check out this article by Steve Dickinson in China Brief, entitled, "Avoiding Mistakes in Chinese Joint Ventures." and this Wall Street Journal article I wrote, entitled, "Joint Venture Jeopardy."

UPDATE: In, "Private Equity, Venture Capital and ‘Fake’ China Joint Ventures," China Hearsay very nicely maps out the way these deals are typically done (using an offshore holding company) and notes that you might have legal recourse in the rare instances where your Chinese partner has "huge assets offshore" in a country in which you can sue and win:

You can tie up the Chinese founders in 100 different contractual knots, but unless those founders have huge assets offshore (real assets, not equity in the holding company) that you can go after in a dispute, they can always tell you to piss off and kick your ass out of the business.

But back to the email and what can happen to a business started through/with a Chinese spouse?

Here are some thoughts:

1. If the marriage works and the business works, then it is all good.

2. If the marriage works and the business fails, the business fails.

3. Because my firm does not represent Chinese nationals seeking to form Chinese domestic businesses (it would not make any sense for them to retain us for this sort of thing), we are not very knowledgeable about this and so I do not know what sort of minimum capital would be required for such a business to hire a foreigner.

4. If the marriage fails and the business works, what happens? This is the key question and I do not know the answer. The business belongs solely to the Chinese spouse, so the question then becomes a Chinese family law issue. What happens under Chinese divorce laws to something that can legally be owned only by the Chinese spouse?

5. What about China's new laws on the "Establishment of Partnerships within China by Foreign Enterprises and Foreign Individuals," set to go into effect on March 1, 2010? These new measures will allow foreign enterprises and individuals to form partnerships with Chinese enterprises and individuals, but it is very hard to say at this point what impact those new laws will have. But, my hunch is that the fees and costs of setting up one of these partnerships legitimately will be roughly the equivalent of setting up a WFOE or a Joint Venture, so I do not see them solving the problem of the foreigner who wants to set up a China business on a shoestring.

The race for best blog in the ABA Journal competition is really heating up and time is running out for me to beg and plead for you to vote for the China Law Blog as best blog in its category. I therefore strongly urge all of our readers to click here and register on the site and then click here and vote for China Law Blog in the "geo" category. Your vote really does count and it will be much appreciated. Thanks.

If you like this blog and have not yet joined up as a member of the China Law Blog Group on Linkedin, you are really missing out.

About two weeks ago, I asked the Group to list out what they thought to be the best ten books on China business. Within about a week, Forbes Magazine asked me to write an article on the same thing. That article, entitled, "Best 10 Books On China: Planning your first business trip to China? Here's a guide," just came out today.

So without further ado, here's my list (in the order in which I am suggesting they be read, not in order of quality):

1. Lost on Planet China: The Strange and True Story of One Man's Attempt to Understand the World's Most Mystifying Nation or How He Became Comfortable Eating Live Squid, by J. Maarten Troost.

2. Chinese Lessons: Five Classmates and the Story of the New China, by John Pomfret.

3. River Town: Two Years on the Yangtze (2001, HarperCollins, $14.40), or Oracle Bones: A Journey Between China's Past and Present (2006, HarperCollins, $17.79), both by Peter Hessler.

4.Out of Mao's Shadow: The Struggle for the Soul of a New China, by Phillip P. Pan (2008, Simon & Schuster, $18.48).

5.Postcards from Tomorrow Square: Reports from China, by James Fallows (2009, Vintage Books USA, $10.17).

6. China Shakes The World: A Titan's Rise and Troubled Future and the Challenge for America, by James Kynge (2006, Houghton Mifflin Harcourt, $20.00).

7. The China Price: The True Cost of Chinese Competitive Advantage, by Alexandra Harney (2008, The Penguin Press, $17.78).

8. Mr. China: A Memoir, by Tim Clissold (2005, HarperCollins, $15).

9. One Billion Customers: Lessons from the Front Lines of Doing Business in China, by James McGregor (2005, Free Press, $2).

10. China CEO: Voices of Experience from 20 International Business Leaders, by Juan Antonio Fernandez and Laurie Underwood (2006, John Wiley & Sons, $14.96); and/or Where East Eats West: The Street-Smarts Guide to Business in China, by Sam Goodman (2008, BookSurge Publishing, $18.99).

If you want my explanation of the above, please go here for the Forbes article. And if you disagree (or agree) with me, please let me (and everyone else) know by commenting on this blog post or by adding to the ongoing discussion on our Linkedin Group.