LEGAL RISK OF INVESTING OR DOING BUSINESS IN CHINARisk Management Day PresentationOrganized By:Quebec Risk Insurance and Management Association

SPEAKER: EDMOND C. LUKEMarch 16, 2006

Introduction

Characteristics of the Chinese Legal SystemOrganizational Structures for Foreign EntitiesForeign Investment Guidelines and RegulationsContract LawProperty RightsLegal Due DiligenceDispute Resolution

Legal System Characteristics

China’s Contemporary Legal SystemRooted in Confucianism, Daoism, LegalismTreaties between China and Western PowersInfluence of Marxism-Leninism, Mao Ze Dong Thought and Soviet Legal SystemAdoption of laws from international sources in commerce, foreign investment and securities regulations

Legal System Characteristics (cont’)

Legislative InstitutionsNational People’s CongressPresidentState CouncilMinistriesAdministrations and CommissionsLocal People’s Congress

Legal System Characteristics (cont’)

MinistriesMinistry of CommerceMinistry of Information IndustryMinistry of Labour and Social SecurityMinistry of EducationMinistry of Science and TechnologyMinistry of Land and Natural Resources

Legal System Characteristics (cont’)

Administrations and CommissionsState Environmental Protection AdministrationState Reform and Development Planning CommissionState Drug AdministrationState Asset Regulatory CommissionChina Banking Regulatory CommissionEtc.

Legal System Characteristics (cont’)

RisksTradition, adoption and imitation of lawsLegislative bodiesLack of transparencyAmbiguous languageAdministrative policies and directivesPolitical interferenceGuanxi – relationship influences

Organizational Structures

Foreign Investment Enterprises (FIE)Representative OfficeWholly Foreign-Owned Enterprise (WFOE)Equity Joint VentureCooperative Joint VentureHolding CompanyForeign-Invested Venture Capital Investment Enterprises (FIVCE)

Organizational Structures (cont’)

Risks:High restrictive and lacks flexibilityStrictly monitored and regulatedLimitation on business activitiesProtectionism

Foreign Investment Guidelines and Regulations

Catalogue Guiding Foreign Investment“encouraged”“restricted”“prohibited”“permitted”

Foreign Investment Guidelines and Regulations (cont’)

Risks:State planned economyApprovals, Approving authorities, Approval proceduresForeign Exchange Restrictions

Contract Law

History and characteristicsFormationLanguageForum and jurisdictionApprovals and registrations

Contract Law (cont’)

RisksSimplied formoral representationsProcedural compliance affecting validityAffect of administrative rules and regulations

Property Rights

State ownershipRight to use landRestrictions on useAcquisition methodsTransferability

Property Rights (cont’)

RisksSearchesPayment of user fees and taxesChange of usePre-emptive right to purchaseExpropriation

Legal Due Diligence

Investment in State Owned businessValuationApprovalsTechnical capabilities of assetsEnvironmentalPermit and LicensesOwnership of assets

Legal Due Diligence (cont’)

Risks:Accessibility to informationAvailability of investigatorsProper approvalsNon-compliance to standardsReliance on local government assurances

Dispute Resolution

Forms of dispute resolutionConsultationMediationArbitrationLitigation

Dispute Resolution (cont’)

MediationPrimary vehicle of dispute resolutionMediation during arbitrationMediation during litigationJoint Mediation

Dispute Resolution (cont’)

ArbitrationChina International Economic and Trade Arbitral Commission (CIETAC)Domestic arbitral commissionsEnforcement of Awards

RisksInvalid arbitration clauseRefusal to enforce

Dispute Resolution (cont’)

LitigationCourt system:

Supreme People’s CourtHigher People’s CourtIntermediate People’s CourtBasic Level People’s Court

Risk:Process and ProcedureEnforcement of foreign judgmentConsistency

Conclusion

Risk versus OpportunitiesLegal Development TrendResources