What We’re Working on in Difficult Economic Times

Welcome everyone to another edition of my China Tech Law Newsletter.?

Yes, we are still seeing investments in China, and the recent Q1 GDP figures show the economy is hanging in there.? One of the developments I’m watching the most is companies not just staying in China because of the market size or supply chain importance, but to be there and learn as part of the ecosystem, as part of a center of global excellence.? Case in point VW’s massive new $2.7 billion investment announced recently.

There is no question that foreign direct investment to China has slowed.? But in difficult times, we do tend to see an uptick in the number of employee terminations, commercial disputes (even leading to litigation), and company liquidations.? I’ve written about all of these topics before, but here’s a quick high-level refresher.?

Employee Terminations

Economic uncertainties often necessitate downsizing, leading to increased employee terminations. China has stringent labor laws, requiring adequate severance and ensuring procedural fairness.? You need to have a handbook in place to be able to point to something close to "cause" for firing in the case of genuinely problematic employees.? For mere downsizing, many clients ask about the “change in objective basis on which a labor contract was formed” prong under the law to justify terminating employees.? We always caution – this can be used as a grounds but will ultimately fail in labor arbitration or court if challenged.?

Look, for many companies in these circumstances, your employees likely will already see layoffs coming.? Pay severance and treat employees with respect to give them proper “face”, and generally you will avoid too many unnecessary complications.?

See the full post here.

Commercial Disputes

Economic strains often heighten commercial disputes as companies struggle to meet contractual obligations. ?Hopefully you have been reading this blog and know to draft contracts with an eye towards enforcement from the beginning – (1) a bilingual English-Chinese contract, (2) Chinese governing law if you can wrap your head around it (with your lawyers), and (3) dispute resolution set as arbitration if you insist on having things handled as much as possible outside of China, or courts in a major first-tier city in China for less cost and ease/speed of enforcement.?

See the full post here.

Litigation

For the actual dispute, try negotiations/mediation at first, but don’t be afraid to litigate especially if the relevant evidence is sitting in China.? Authentication of that evidence will be significantly easier.? Otherwise, prepare for an extra time and expense which sometimes may be too prohibitive for very small amounts at stake.

See the full post here.

Liquidations

The biggest concern here is to be sure you do not sleepwalk through the process.? Remember, once the company approaches insolvency, you owe a duty just as much to your creditors as you owe a fiduciary duty to the shareholder(s).? You simply have to setup a formal process and do it right, clear all of your tax obligations, and just get it done.

See the full post here.

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Navigating the legal landscape in China during an economic downturn requires tailored strategies.? We do not necessarily like it when this kind of work keeps us busy, but the reality is now is not the time to skimp on legal advice.? Downsizing a business is just as fraught with legal risks as much as not structuring a new investment properly.

Okay, another blog post in the books.? Thank you again everyone for reading and subscribing.? See you back in another week!