China Closes Prominent International Hospital: YOUR Most Important Lesson for the Year

 

China WFOE
Photos from Hong Kong Free Press

According to the Hong Kong Free Press (and a number of other newspapers) The Shanghai government this week “ordered the closure of one of the city’s top maternity hospitals saying that it was illegally built on land owned by the armed forces, according to an official notice.”

According to the article, the hospital, Shanghai Redleaf International Women’s and Children’s Hospital, was “founded by Canadian investors” and it had “signed a 20-year lease for prime real estate owned by the military on central Shanghai’s Huaihai Road and started catering to foreigners and wealthy Chinese more than four years ago.” But because “The People’s Liberation Army has been banned from commercial activities since 1998” the hospital was being forced to close. The HK Free Press says this “hospital is one of the largest private business affected by the so-called de-commercialisation of the military to date.” The article then quotes the district government as saying “There exists a matter of illegal construction of building at the Redleaf Hospital. It must be rectified duly in accordance with relevant laws.”

Not surprisingly many patients and hospital employees were not happy with the closure:

A gynecologist who was vacating her workplace Sunday afternoon said that the owners, a Canadian couple, had invested billions [of RMB, presumably] into the clinic. “They had all the right documents and invested so much money… it just doesn’t seem fair,” she said.

Christine Cheng had been working as a nurse at Redleaf’s gynecology department for almost two years. “We spent a lot of money and work building this, and now the government wants us to move… We didn’t do anything bad,” she said.

When news transpired last Thursday that the upscale facility would be forced to close, some of the about 300 staff affected hung banners outside the main building criticizing the facility’s imminent closure.

The banners said that while the hospital supported the government, it shouldn’t be forced to move, adding that it wasn’t a “soft tomato” — a Chinese expression for a pushover. Police arrived on the scene shortly afterward and ordered that the banners be removed.

Louise Roy, director of patient support services at Ferguson Women’s Health, a clinic that rents facilities inside the Redleaf complex, said that staff first heard about the possibility of a closure several months ago, although they were never given confirmation or a specific date. “They’ve told us nothing — absolutely nothing,” Roy said. “We came in this morning, like [we do] every day. Then we saw staff gathered outside where the banners were hung, and then the police came.”

Several women who were being treated at the hospital were clearly upset as they collected their medical records before closure.

“I found out from a friend,” said a 32-year-old patient named Jennifer who would not give her last name because of privacy concerns. She said that she had moved to Shanghai from the U.S. recently and was planning to deliver her child at Redleaf in three months. “I have friends who are due in two weeks or a month — I don’t know what they are going to do,” she said.

Wang Jue, PR supervisor, said that one patient in labor arrived at Redleaf over the weekend and was turned away by government officials. She arrived at another clinic just 10 minutes before giving birth.

Redleaf’s services have been highly sought-after by those who can afford them. A standard cesarean section delivery at the hospital costs 120,000 yuan, and a prenatal package is priced at 24,000 yuan.

Patients have been referred to a temporary clinic while Redleaf is working on a more permanent solution.

I do not know what happened with this hospital beyond what I read in the newspapers. I can though discuss some of what my firm’s China lawyers have seen in possibly similar situations over the years and I do so below.

Maybe fifteen years, a very savvy foreign businessperson came to my law firm with a proposed deal that involved our client building a hotel. Just about everything about the deal was perfect. The location was perfect. The cost was perfect. The deal with the landlord was perfect. There was just one flaw: the land on which the hotel was to be built was owned by the military and that made the entire deal 100% illegal.

We explained the clear illegality of the deal (in writing of course) to our client, who already knew it. But like I said, this was a long time ago and our client was very savvy. His response was something like the following:

Yes, I know this deal is illegal and I know that means I am at risk of the government coming in and shutting us down the day after (or even before) we build the hotel. But we’ve run all the numbers on this and the numbers tell us that all we need to do for this deal to be an economic positive is last three years and every year after that the hotel will be a cash cow. So even though I know full well all the risks, I am willing to take them because I am willing to bet we can last at least three years.

The client did the deal and ended lasting for around eight years before shutdown and ended up making a lot of money. The client’s eight year tenure ended around 7-8 years ago and for probably the last ten years our China lawyers have simply said “no” to such deals, as they have simply become too risky. This does not mean our firm has not continued to see a slew of deals and WFOE formations we know violate China law. I can hear myself saying the following to the companies that bring us such deals and WFOE formations simply because I have said it so many times in my China law career:

What you are doing is illegal and you will get caught. When will you get caught? I don’t know that. It could be tomorrow or it could be a year from now. It probably will be in less than two years from now. Maybe if you had come to me ten years ago with this deal (or WFOE formation) I would not have been so unrelentingly negative about it, but China has changed. China has become incredibly serious about enforcing its laws (at least as against foreign companies, which are the only clients we have in China) and so we see every day what happens to foreign companies that are doing business in China or with China. Not only has China gotten more serious about enforcing its laws, it has gotten way better at enforcement. China is highly computerized and its various agencies and governmental bodies are quite sophisticated at communicating with each other.

We need to change your deal (or your WFOE formation). We are not going to put our reputation on the line for this sort of deal.

Oh, and one more thing. When you go back to your Chinese counterpart or to your own China employees/people on this, they will tell you I am exaggerating or I am naive or I just flat out “don’t know China.” I would never claim “to know China” because I don’t, but I do know is what happens to foreign companies that violate China law and I also know that at least once a month one of our China attorneys gets a call from a foreign company in trouble for having violated some law in China. And when I say trouble I mean they are facing millions of dollars in fines or closure of their operations or in some cases arrest and criminal charges.

Most of the time, the client then explains that they didn’t know that their deal (or WFOE) would be illegal (or as they often put it, “so illegal”). Some of the time though they do view us as naive or as overcautious and they move on.

In 2010, in Cracking Down On Illegal Land Use In China. Do You Really Still Feel Lucky, Foreign Punk? I wrote about foreign companies

The following is an amalgamation of a number (maybe 5 or 6) of conversations I have had over the years with people wanting to register a WFOE (Wholly Foreign Owned Entity) in China fast:

Potential Client: Can you help me register a WFOE in China.

Me: Yes. Not a problem. Do you have a lease yet? Do you know that a legitimate lease is required for the approval of a WFOE?

Potential Client: I know that but we are in a real hurry here.

Me:  Okay. But do you have a lease.

Potential Client: We have a lease but I don’t think it technically will qualify.

Me: What do you mean?

Potential Client: The land is zoned agricultural but my Chinese partner has secured all the okays to allow us to use it for our factory.

Me: Not a good idea. Trust me on that.

Potential Client: The factory has been there for two years without a problem and my Chinese partner assures me that the local government is fine with it.

Me: Don’t do it. Right now, the local government is okay with it. But what if the current mayor is pushed out next week on corruption grounds. Do you really want to be in a situation where you have spent a large amount of money on a space that gets shut down?

Potential Client: I am in a hurry and this is the only space that works.

Me: Are you sure? You are in a hurry, but is it really going to be worth the few months if you get shut down?

Potential Client: I am not going to get shut down. My Chinese partner is incredibly connected.

Me: Incredibly connected to the current local administration, MAYBE, but as I said, that administration could be out the door next week. Beijing checks on these things too and if they see that your facility is illegal, Beijing could see to its shut-down. I just don’t think it a good idea to go into a WFOE illegally and my firm cannot be a part of that.

Potential Client: That’s ridiculous. This is how business is done in China. Are you really saying you won’t take us.

Me: Yes. We won’t take you because we do not want our reputation damaged when you get shut down and we won’t take you because we do not want to be blamed when you get shut down.

Potential Client: Well I am sure I will have no trouble finding someone to help me on this. Good-bye.

I know that at least one of these companies did end up getting shut down (within about a year) because someone at the company who had sided with me on the company not going forward emailed me to tell me of this.

Now might be a good time for you to read the following:

Just yesterday, in China Law as California Law: There be Wolves out There, I wrote of how common it is for Chinese consumers and employees to sue foreign companies and I concluded that post with the following admonition on the importance of knowing and abiding by China law:

Yes, doing business in China is difficult and its laws are complicated, but that is true of pretty much every country I know. Be it California or China, it’s on you. People the world over — and that most certainly includes China — are ultra-litigious and that is not going to change soon if ever. Your defense to this is to know the laws and abide by them, to the letter. Saying that the laws are difficult or that there are bad people out there does not cut it and you ought to know that. Oral agreements in China are not worth the paper on which they are not printed and written agreements drafted by anyone not experienced with Chinese language contracts have no greater value.

You have been warned (yet again).

Today’s post is another warning.
 

 

This article was written by Dan Harris and published on China Law Blog. Original Post: http://www.chinalawblog.com/2017/09/china-closes-prominent-international-hospital-your-most-important-lesson-for-the-year.html      

View the original article here.

Dan Harris

Dan Harris is internationally regarded as a leading authority on legal matters related to doing business in China and in other emerging economies in Asia. Forbes Magazine, Business Week, Fortune Magazine, BBC News, The Wall Street Journal, The Washington Post, The Economist, CNBC, The New York Times, and many other major media players, have looked to him for his perspective on international law issues.