China Update 2012 Navigating Deeper into China Our Annual Review of Key Business & Legal Issues Tuesday, June 19, 2012 Hyatt Regency, Santa Clara, California
Do s and Don ts of Contract Drafting Lothar Determann (Palo Alto) Dr. Glenn DeSouza (Shanghai) Jon Eichelberger (Beijing) Jonathan Isaacs (Hong Kong) Clement Ngai (Shanghai) Kareena Teh (Hong Kong) China Update 2012 Tuesday, June 19
Overview Chinese contracts general considerations Resolving disputes and enforcing rights Protecting technology Managing employment risks Minimising tax through intercompany agreements Do's and Don ts of Contract Drafting 2012 Baker & McKenzie 3
Chinese Contracts General Considerations
Chinese Contracts General Considerations Chinese legal system and environment Three threshold questions: Will the contract be governed by Chinese law? Will the contract be subject to government review or approval? Will the contract have a Chinese version? Drafting guidance: Plain English! Avoid superfluous language and concepts Follow Chinese organization and format The contract is part of the negotiation be strategic Do's and Don ts of Contract Drafting 2012 Baker & McKenzie 5
Resolving Disputes & Enforcing Rights
Dispute Resolution Parties At least one foreign party All Chinese (include FIEs) Governing Law Foreign Law or Chinese Law (limited exceptions) Chinese Law Dispute Resolution Arbitration/litigation in or out of China Arbitration/litigation in China Do's and Don ts of Contract Drafting 2012 Baker & McKenzie 7
Litigation v. Arbitration Enforcement of Foreign Judgments In accordance with mutual, multilateral, or international treaties; or Based on the principle of reciprocity Enforcement of Hong Kong Judgments Mutual Arrangement Enforcement of Foreign Arbitral Awards New York Convention Enforcement of Hong Kong Arbitral Awards Mutual Arrangement Do's and Don ts of Contract Drafting 2012 Baker & McKenzie 8
Litigation v. Arbitration Pre-action injunctions and interim orders against PRC companies Litigation out of China Not available Litigation in China Available Arbitration out of China Not available Arbitration in China Available Do's and Don ts of Contract Drafting 2012 Baker & McKenzie 9
Specific Clauses Liquidated Damages Clause Based on a party s request and at the court/tribunal s discretion Limitation of Liability Clause Lack of guidance Consequential Damages Foreseeable? Do's and Don ts of Contract Drafting 2012 Baker & McKenzie 10
Protecting Technology
Technology Related Contracts Different types: Tech import/licensing, patent licensing/assignment, joint development, contract R&D, intercompany R&D, software development, invention assignment Issues to consider Tech import/export issues Ownership of IP Improvement License fee Patentability Formalities Do's and Don ts of Contract Drafting 2012 Baker & McKenzie 12
Joint Development Agreement Usually with local prestigious universities or institutes Parties to agreement (university, department and/or professor) Ownership of IP (joint ownership, commercialization right & license back) Confidentiality (how to bind professor & students) Government funding Inventor compensation issue Do's and Don ts of Contract Drafting 2012 Baker & McKenzie 13
Managing Employment Risks
Employment Contracts Nuts & Bolts Don't just repeat the law! May clarify matters not clear in the law Garden leave Right to deduct Probationary period Local specific rules on overtime Do's and Don ts of Contract Drafting 2012 Baker & McKenzie 15
Collective Bargaining Prepare first draft Simpler than a US CBA "Zipper" Clause Make contract term as long as possible Flexibility in case of business downturn Do's and Don ts of Contract Drafting 2012 Baker & McKenzie 16
Other Employment Agreements Training agreements Bonus agreements Confidentiality/IP Non-compete, non-solicitation Do's and Don ts of Contract Drafting 2012 Baker & McKenzie 17
Minimising Tax Through Intercompany Agreements
Intercompany Agreements In Tax Planning Drivers Over 60% of global trade is intercompany 95% of economic activity takes place in countries where the tax rate can vary between 25% to 40% (US, EU, Japan, China, and India) Goals How to move profits to areas where effective tax rate is 0-5% (Singapore, Ireland, Switzerland, Netherlands and so forth) Intercompany Agreements Profit reallocation can be justified if accompanied by movement of risks, entrepreneurial activity and IP ownership Do's and Don ts of Contract Drafting 2012 Baker & McKenzie 19
Why Intercompany Agreements Are Being Disregarded Wide disparity between economic substance and legal provisions in the intercompany agreement Tax authorities are looking through the agreements to value added, total employment, KERTs and bonus pools to identify who is really driving the bus Circular 2 at Article 94: The tax authority shall re-define the nature of an enterprise s tax avoidance arrangement based on economic substance, and cancel the tax benefits obtained by an enterprise from a tax avoidance arrangement. Do's and Don ts of Contract Drafting 2012 Baker & McKenzie 20
Adding 3rd Party Elements Benchmarking is based on third party principle and reflects hard market data By contrast intercompany agreements are 100% drafted in-house at corporate headquarters English language prevalence Provisions such as for US arbitration Pages of corporate boilerplate Highly one-sided with limited recourse for subsidiary 5 and 10 model Use actual third party agreements to justify key elements such as IP conveyance Cost-plus formula Exit and buyout options Upside or lack thereof for subsidiary Do's and Don ts of Contract Drafting 2012 Baker & McKenzie 21
Questions?
Thank you Lothar Determann Palo Alto +1.650.856.5533 lothar.determann@bakermckenzie.com Jon Eichelberger Beijing +86.10.6535.3868 jon.eichelberger@bakermckenzie.com Kareena Teh Hong Kong +852.2846.1613 kareena.teh@bakermckenzie.com Clement Ngai Shanghai +86.21.6105.5960 clement.ngai@bakermckenzie.com Dr. Glenn DeSouza Shanghai +86.21.6105.5966 glenn.desouza@bakermckenzie.com Jonathan Isaacs Hong Kong +852.2846.1968 jonathan.isaacs@bakermckenzie.com Do's and Don ts of Contract Drafting 2012 Baker & McKenzie 23
Do s and Don ts of Contract Drafting Tuesday, June 19, 2012 Hyatt Regency, Santa Clara, California This presentation has been prepared for clients and professional associates of Baker & McKenzie. Whilst every effort has been made to ensure accuracy, this presentation is not an exhaustive treatment of the area of law discussed and no responsibility for any loss occasioned to any person acting or refraining from action as a result of material in this presentation is accepted by Baker & McKenzie. If advice concerning individual problems or other expert assistance is required, the services of a competent professional adviser should be sought. Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a partner means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an office means an office of any such law firm.