Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.
Our China attorneys got a couple of emails in the past month that went something like this (I’ve combined the two and changed them a bit to hide any potential identifiers):
I have a Chinese friend with whom I want to start a consulting business. I would be the main consultant and the upfront “image” of the company. She is proposing that we use her existing consulting company for this business and that we sign a private agreement giving me 50% ownership in her company. Now, I know the regular ways for a foreigner to do business in China [WFOE and Joint Venture] — mainly from reading your blog — and this way is not one of those. My question therefore is whether a private agreement between us can have validity in order to claim profits, ownership, etc., in a situation like this? Thank you!
Really? Think about this for just a second. This email essentially says, I know that foreigners are not allowed to have ownership in privately held Chinese companies, but I think I may have come up with a way to make that work. I will do a private agreement saying that I have ownership in this company and I am just writing you to make sure this makes sense.
Well guess what? This makes zero sense. Less than zero sense. So little sense in fact that I am not even sure what the question is.
What is meant by a private agreement anyway? I mean is this opposed to an agreement between two parties where they go to the town square and read it aloud to anyone passing by and then post it on the Internet? Look people, foreigners in China are not allowed to have ownership in private domestic companies. If you have a “private agreement” that says you as a foreigner own 50% in a privately held Chinese company, no Chinese court is ever going to say: “Oh, this is great. It is 100% illegal for a foreigner to have ownership in private Chinese companies, but because you have sought to violate the law via a ‘private agreement’ I am going to enforce that agreement and give you 50% ownership in this company, along with all of the profits that come with that ownership. I am doing this because our government wants to encourage people to seek to go around our laws and because I so much appreciate that you didn’t read aloud this private agreement on the town square nor post it on the Internet.”
In my career as a lawyer I am now up to three times where people have cried when speaking to me and in none of those occasions were the people clients and all three of those situations involved “side deals” somewhat similar to what you are proposing. Why do people believe that something that is illegal when done aboveboard would somehow magically become legal when done on the sly? Why in the world would anyone believe a Chinese court would go against clear and explicit law to enforce an agreement that clearly intends to go against clear and explicit law? I truly don’t get it.
Do you?This article was written by Dan Harris and published on China Law Blog. Original Post: http://www.chinalawblog.com/2017/08/quick-question-friday-china-law-answers-part-xlii.html