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Doing Business in China – Part 2 AICPA & ALN Executive International Business Conference June 15, 2011 (11:25am to 12:55pm) New York, NY.

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Presentation on theme: "Doing Business in China – Part 2 AICPA & ALN Executive International Business Conference June 15, 2011 (11:25am to 12:55pm) New York, NY."— Presentation transcript:

1 Doing Business in China – Part 2 AICPA & ALN Executive International Business Conference June 15, 2011 (11:25am to 12:55pm) New York, NY

2 American Institute of CPAs Introductions Jing S. Vivatrat, Co-Founder of American Learning Network, Washington, D.C. (Moderator) Structuring Foreign Corporate Entities in China Jing S. Vivatrat, Co-Founder of American Learning Network, Washington, D.C. (Moderator) Understanding China’s Business Culture Landscape Karl Engkvist, Chief Operations Officer, Campus Direct, former Executive Vice President, Blackboard, Washington, D.C. Brand Protection in China Eric T. Fingerhut, Dykema Gossett PLLC, Member, Trademark Practice Group Leader, Washington, D.C. Patent Protection and Legal Representation in China Christopher Shaowei, Chinese Attorney at Law and Chinese Patent Attorney, NTD Law Office, NTD Patent & Trademark Agency Limited, Liaison Office, Palo Alto, CA. Agenda

3 American Institute of CPAs Structuring Foreign Corporate Entities in China Jing S. Vivatrat American Learning Network, LLC

4 American Institute of CPAs Regulatory Framework Foreign Direct Investment (FDI) and Mergers and Acquisitions (M&A) in China have to be viewed and structured in terms of a legal entity A legal entity can only engage in approved business activities defined by the “Approval Certificate” issued by Ministry of Commerce or its local counterpart Generally, one legal entity is often legally permissible to do one product or service or a series of products or services that are similar in nature. However, in some cities, like Beijing, one legal entity may engage in any business except for those subject to prior approvals by competent authorities. Setting up a legal entity requires substantive government approvals prior to registration of the entity Important central government level agencies: National Development and Reform Commission (NDRC), Ministry of Commerce (MOFCOM), State Administration of Industry & Commerce (SAIC), State Administration of Foreign Exchange (SAFE) Other competent authorities in charge of the specific product or service

5 American Institute of CPAs Regulatory Framework Important Resource: Catalogue of Industries for Guiding Foreign Investment (Revised 2007) 3 categories of FDI: Encouraged, Restricted and Prohibited, relevant for approval, equity limitations and tax/customs incentives Within the Encouraged and Restricted categories, certain industries are labeled: “Limited to EJV,” “Limited to CJV,” “Limited to EJV or CJV” “With the Chinese party having a controlling share” or “with the Chinese party having a comparatively controlling share” Policy dictates maximum shareholding of the foreign entity

6 American Institute of CPAs Regulatory Framework Industry-Specific Administrative Permits Volume of industry-specific policies, rules and regulations in China is growing at an explosive pace In some industries, both domestic and foreign investors have to obtain certain permits from competent authorities before the registration of any form of companies in China -Telecommunications, internet content providers, pharmaceuticals, mining The process for the application of the administrative permit usually takes 3 to 6 months

7 American Institute of CPAs Investment Vehicles Foreign Direct Investment (FDI) Direct establishment of Foreign Invested Enterprises (FIEs) Ideal for the industries that do not require industry-specific administrative permits Mergers & Acquisitions (“M&A”) Convert the Chinese entity into a FIE Ideal for the industries that require industry-specific administrative permits Equity vs. Assets Anti-monopoly review and national security review

8 American Institute of CPAs Choice of Legal Entities – Equity Joint Ventures (EJV) Independent PRC legal entity with limited liability Must be approved by appropriate central government authorities (MOCOM, and NDRC or their local counterpart) Legal minimum requirement for registered capital is RMB 30,000; industry-specific regulations may set the threshold much higher than the legal minimum Profits and losses must be distributed in proportion to each party’s contribution to registered capital (equity interest of EJV) At the end of EJV term (usually 20-50 years) it may be extended or liquidated, and proceeds are distributed between investors EJV must maintain statutory debt/equity ratios Normally foreign investors cannot withdraw contribution to registered capital during the term of EJV Intangible capital contribution (i.e., technology) should be less than 30% of EJV’s registered capital Local authority (such as Beijing MOFCOM) seldom approves the contribution of technology into the registered capital At least 25% of equity capital must be held by foreign party (in form of cash, equipment, technology, land use right); otherwise, entity will be considered a domestic enterprise The termination of EJV must be approved by the original foreign investment approval authority

9 American Institute of CPAs Choice of Legal Entities - EJV A good EJV local partner offers the following potential advantages to foreign investors: The use of local partner’s marketing and distribution network and expertise The ability to offer after-sale services Access to the local partner’s government relationships

10 American Institute of CPAs Choice of Legal Entities - Wholly Foreign Owned Enterprise (WFOE) An entity formed by two foreign entities in China qualify as a WFOE WOFE is an independent PRC legal entity with limited liability Types of business in which they may engage in are narrower than those permissible for EJV and CJV Legal minimum requirement for registered capital is RMB 30,000 (must be sufficient in light of size of FIE’s operations) Capital contributions of technology can account for no more than 20% of the WFOE’s total registered capital Required to sign separate contracts with government authorities or Chinese business entities for land use rights, buildings, and utilities

11 American Institute of CPAs Choice of Legal Entities – Representative Office A Representative Office is not considered a legal person under Chinese law due to the following: Does not require any registered capital Business scope is limited to non-revenue generating activities as mentioned above May facilitate business transactions, but may not consummate its final deals (i.e., receiving payment for products sold, or signing a sales contract) The main benefit of a Representative Office is to serve as a stepping stone in establishing a permanent presence in China, before committing a large capital investment The main function of a Representative Office is confined by Chinese law to the following activities: Hiring a chief representative who may be a foreign national or Chinese national Conducting market surveys and research Acting as a liaison office between the home office and its (potential) Chinese clients / government authorities

12 American Institute of CPAs Location Selection Currently, there are at least eight major types of special investment zones and areas in China: Special Economic Zones Shanghai Pudong New Area and Hainan Province More than 40 Economic and Technology Development Zones (ETDZs) Coastal Open Economic Zones 5 bonded/free trade areas Provincial Capitals More than 50 High Technology Development Zones (HTDZs) Western and central regions of China that the government recently introduced preferential policies aimed at encouraging investment

13 American Institute of CPAs Case Study – Education Technology Karl Engkvist Campus Direct

14 American Institute of CPAs Education Technology Company Experience Blackboard Background CERNET Background Higher Education Enrollment Growth China Market Entry Strategy Master Distributor or Joint Venture? “Cerbibo” created in 2003, and joined together The world’s most popular eLearning platform, the Blackboard Learning System, and A proven Chinese sales channel, CERNET Corporation, which has achieved 95% market share

15 American Institute of CPAs Higher Education 2,800 universities Enrollment Growth -1998: 8 million students -2003: 18 million students -2008: 27 million students Project 211 Project 586 “Go West” K-12 300 million students 600,000 schools E-Learning Solution Address growth in demand Enable growth without physical infrastructure Encourage interaction Provide personalization Centralized administration and access Market Opportunity

16 American Institute of CPAs “GMT +5” Perspective (DC) Intellectual Property Protection Accounting Procedures The GAAP gap Pricing Models Guanxi – hao bu hao? “GMT -8” Perspective (Beijing) American Software for Chinese Education? Software wants to be free Taiwanese translators The Mountain is High and the Emperor is Far Away Obstacles and Mitigation Strategies My first business trip with our partners ….

17 American Institute of CPAs 17 One Successful Approach James Cook University ( 澳大利亚 ) Kyoto Seita University ( 日本 ) Temasek Polytechnic ( 新加坡 ) University of Northumbria ( 英国.) Freie Universitaet Berlin ( 德国 ) Universitat Ghent ( 比利时 ) University of Oregon ( 美国 ) University of South Florida ( 美国 ) San Francisco State University ( 美国 ) 中国海洋大学 亚太地区 欧洲 美洲

18 American Institute of CPAs Market leader with more than 250 universities Top universities leading the way Dynamic and Engaged User Group in China Adapted to local market “KFC” model Local Decision Making 24 hour lag time not an issue Correct partner for the market stage Results and Success Factors

19 American Institute of CPAs Lessons Learned “Desire to Modernize” is not a “Desire to Westernize” Scale cannot be overemphasized Numbers Distances Timelines Ancillary Benefits for US companies Global impact 5,000 Years of Culture offers a lot of precedent There is a reason why things are the way that they are

20 American Institute of CPAs Intellectual Property Protection and Enforcement in China Trademarks Eric T. Fingerhut Dykema Gossett PLLC

21 American Institute of CPAs Counterfeits and Obvious Imitation Color the U.S. View of Chinese IP Law and Enforcement

22 American Institute of CPAs

23 US Media Loves to Report China’s Failure to Protect IP But…….. China’s Long History of Innovation Paper – Silk -- Gunpowder The World’s Second Largest Economy (behind USA) Problem is Not the Lack of IP Laws Chinese TM Law Fairly Simple and Effective if Understood and Followed The Key to Doing Business Successfully is Understanding Chinese Culture and Etiquette An Evolutionary Process

24 American Institute of CPAs If You Remember One Thing about Protecting Brands in China, Let it Be This: File First and As Broadly as You Can! China is a “First to File” Country The right to use a mark unimpeded is dependent on having a registered trademark Exception for well-known marks almost impossible to attain All US Companies Doing Business in China Should Register their Trademarks in China Before Entering Even companies which only source and export Cheaper for company to register its trademarks than litigate its right to continue using them Contrary to media reports, China does a fairly good job of registering trademarks 830,000 TM Applications filed in 2009 1,007,000 TM Applications filed in 2010 (first in the world)

25 American Institute of CPAs TM Registration Process Filing Considerations Whether to register English and Mandarin Translations? Yes. Other dialects? Perhaps Be sure to work with a Chinese linguist to ensure the best translation or transliteration for your brand! File Defensively for as many mark variations and in as many classes as you can afford Protection for Goods, Services, Collective Marks and Certification Marks, 3D Marks (configurations and trade dress) Applications examined on absolute and relative grounds Absolute – distinctiveness Relative – does the mark conflict with a prior right?

26 American Institute of CPAs TM Registration Process (Continued) Applications screened and published for opposition purposes (3 months) If no oppositions, the mark is registered If opposed and Chinese TM Office (TMO) supports objection, application is denied. Denied applications may be appealed to SAIC TM Review and Approval Board (TRAB) and then to the People’s Court (e.g., Beijing High Court). Objections to trademarks are rare.

27 American Institute of CPAs The Power of a Chinese TM Registration Defensive Right to Use Offensive Right to Enforce Suits for infringement, seeking damages and an injunction Chinese courts in more commercialized parts of China are willing to enforce China’s TM laws, even for foreign companies Trademark Infringement is a Crime Complaints to the office of the public prosecutor may result in criminal prosecution of infringer Chinese police help with seizures and shut downs Court can impose fines and imprisonment Customs notified to prevent export of counterfeit goods

28 American Institute of CPAs Enforcement Options Administrative Litigation Effective, Quick and Cheap No Jail; No Compensatory Damages Not much of a Deterrent Civil Litigation 2-Year Statute of Limitations Statutory Damages Available where Actual Damages Cannot be Proven Statutory Damages Limited – 500,00 Yuan - $65,009 US Criminal Prosecution Criminal prosecution results in fines but prison sentences are difficult to execute

29 American Institute of CPAs Third Amendment to China TM Law (Draft 2009) First Law Came in Force in 1983 and Amended Twice in 1993 (US Pressure) and 2001 (WTO) Eliminate Visibility Requirement Enables registration of smell and sound marks Allow Multi-Class Applications Uniform Standard for Domestic and Foreign Geographic Names Now, secondary meaning for Chinese geographic names and well- known requirement for foreign Require Chinese Nationals to Prove Business Interest With Applications Elimination of Relative Grounds Examination Allowing Applicants to Resond to Preliminary Refusals

30 American Institute of CPAs Third Amendment to China TM Law (Draft 2009) - Continued Oppositions to be Filed Directly with TRAB instead of TMO **Attorneys Fees and Costs Available in TRAB Proceedings** Express Prohibition of Parallel Imports One non-binding case holds parallel imports are infringements because they are unauthorized by TM holder; but lots of debate Defensive Registration System Damages Changing from Plaintiff’s choice between losses and profits to requiring court to try to determine losses and, if not possible, assessing lost profits in an amount capped at $144,000 (up from current $72,000)

31 American Institute of CPAs Other Issues Delays: TM Application Examination Can Take Up to Three (3) Years Opposition and Cancellation Resolution Can Take as Long as Eight (8) Years Lack of Resources TM Owners Must Do All the Work; No Help from Local Police Who are Resource Strapped Favoritism – Indigenous Innovation Indigenous innovation policies require U.S. Companies to cede ownership of IP to Chinese companies Chinese government procurement linked to IP location/ownership During Most Recent Visit, President Hu says China Government will use only Licensed Software

32 American Institute of CPAs Patents Christopher Shaowei NTD Law Office Copyright NTD Intellectual Property Attorneys

33 American Institute of CPAs Enforcement Maze Copyright NTD Intellectual Property Attorneys

34 American Institute of CPAs Complaints from Outside No Discovery Lack of Transparency Unpredictability Local Protectionism Insufficient damages award Copyright NTD Intellectual Property Attorneys

35 American Institute of CPAs Enormous Amount of Patents Filed Copyright NTD Intellectual Property Attorneys

36 American Institute of CPAs Statutory Subject Matters Protected by Patent Laws Invention Patents: 20 years Manufactures Machines Processes -Computer-related Invention and Business Method Compositions Utility Models (comparing with “Gebrauchsmuster”): 10 years Manufacturers ( Products) Machines Design Patents: 10 years Shapes Patterns Colors with the combination of shape and/or pattern Copyright NTD Intellectual Property Attorneys

37 American Institute of CPAs Different Features from U.S. Patent Statute First Filing Rule: Everywhere except US No Duty to Disclosure Utility Model System: EPO National Priority vs. Provisional Application Copyright NTD Intellectual Property Attorneys

38 American Institute of CPAs Legal Framework and Others Patent Laws Trademark Laws Laws Protecting Trade Secrets GUANXI: Indigenous Rules Copyright NTD Intellectual Property Attorneys

39 American Institute of CPAs ? Question ? Can your IP get protection automatically in China without your care? Answer: Copyright NTD Intellectual Property Attorneys

40 American Institute of CPAs ? Question ? Can you use the same strategies to enforce your IP in China as you use in the United States? Answer: Copyright NTD Intellectual Property Attorneys

41 American Institute of CPAs Enforcement Framework Parallel Enforcement System: Administrative Authorities vs. Judicial System Administrative Authorities vs. Judicial System Criminal Proceedings and Civil Proceedings Market Share vs. Compensation Copyright NTD Intellectual Property Attorneys

42 American Institute of CPAs No Filing No Protection GM Daewoo vs. Chery Copyright NTD Intellectual Property Attorneys

43 American Institute of CPAs Good Filing Good Protection Neoplan vs. Zonda etc., design patent of Starliner bus Beijing First Intermediate Court January 2009 RMB 21,160,000 (USD 3,1M ) Copyright NTD Intellectual Property Attorneys

44 American Institute of CPAs A Utility Model Infringement Case Copyright NTD Intellectual Property Attorneys

45 American Institute of CPAs July 2006, Chint accused Schneider Electric of selling products on the basis of Chint’s technology April 2007, Chint’s utility model was confirmed valid September 2007, Schneider Electric lost a patent infringement lawsuit and was ordered to pay $48 million in damages. April 16, 2009, Schneider settled the case by the payment of $22 Million A Utility Model Infringement Case Copyright NTD Intellectual Property Attorneys

46 American Institute of CPAs Don’t Let Mistakes Happen There are no international prior user rights Register your patents as early as possible Be careful in dealing with local partners Patent search Freedom to operate Copyright NTD Intellectual Property Attorneys

47 American Institute of CPAs This is a Pro-Genuine Products Country Copyright NTD Intellectual Property Attorneys

48 American Institute of CPAs Resources U.S. Department of Commerce and EC Directorate General for Enterprise and Industry – China Toolkit International Trademark Association (INTA) Country Guides Etiquette Guide to China – Boye Lafayette De Mente – Tuttle Publishing (2008) Guanxi (The Art of Relationships) Microsoft, China and Bill Gates’s Plan to Win the Road Ahead – Robert Buderi and Gregory T. Huang – Simon & Shuster (2006)

49 American Institute of CPAs Speaker Biographies Jing S. Vivatrat Co-Founder, American Learning Network Washington, D.C. Jing S. Vivatrat was most recently the Director of Workforce Development at the Federal Communications Commission. Jing is also the founder and Principal of JSVI, an international strategy consultancy. Prior to forming JSVI, she served as the Executive Director of Mergers & Acquisitions at AOL's International Division where she structured and negotiated strategic partnerships for AOL in Greater China, Japan, Australia, Canada, and Latin America. While at AOL International, Jing played a major role in negotiating AOL's joint venture with Lenovo Holdings and thereafter spent one year in China to set up AOL's China joint venture operations and run the Business and Legal Affairs department for the joint venture. Jing left AOL to join Blackboard Inc., a leading education platform software company, to serve as the Executive Director of International Operations, where she developed and managed Blackboard's international expansion strategy. Prior to AOL and Blackboard, Jing spent several years as an investment banker structuring telecommunications and infrastructure M&A transactions in Southeast Asia. Before working in Asia, Jing was a consultant with Accenture. Jing is a graduate of Wellesley College and commands native fluency in Mandarin Chinese.

50 American Institute of CPAs Karl Engkvist Chief Operating Officer, Campus Direct Bethesda, MD Karl Engkvist has deep expertise in online education technology development and operations. For 11 years, he advanced through a series of leadership positions at Blackboard, Inc., the global leader in education technology. After directing business development, operations and strategic development for the fast-growing company, Karl moved to China, where he served as Chief Operating Officer in charge of Cerbibo, Blackboard's joint venture with the Chinese Ministry of Education. Cerbibo became the market leader among e-learning providers in mainland China, and today counts more than 250 mainland Chinese universities as its clients. Karl returned to the U.S. in 2006 to spearhead Blackboard's integration with WebCT. He then served as Senior Vice President of International Strategy and Operations, finally Executive Vice President of Blackboard Connect, and focused on communication services for education institutions. Prior to joining Blackboard, Karl spent 10 years with Princeton Review, managing marketing and operations of the test preparation business unit and implementing partnership programs with Fortune 500 companies to propel growth. Today, he is Chief Operating Officer of Campus Direct, a global provider of e-learning solutions to universities. Karl holds a bachelor's degree in history from Dartmouth College.

51 American Institute of CPAs Eric T. Fingerhut Member, Trademark Practice Group Leader, Dykema Gossett PLLC Washington, D.C. Eric Fingerhut's practice covers all aspects of intellectual property law, particularly trademarks. He has helped protect the brand identities and managed the reputations of many of the world's best known names in the automotive, clothing, food, hospitality and technology industries. Eric's experience includes legal clearance, procurement, protection and enforcement programs, and managing extensive domestic and foreign trademark registration portfolios. His transaction experience includes trademark licensing. Prior to joining Dykema, Mr. Fingerhut was an intellectual property law partner at Howrey LLP, where he provided cost-effective business-oriented legal advice in all aspects of brand identity and reputation management, including trademark, copyright, right of publicity, advertising, marketing, domain name and new media law. Eric is a graduate of Boston University (Bachelor of Science degree) and holds a Juris Doctor degree from Benjamin N. Cardozo School of Law. He is admitted to practice in Virginia and the District of Columbia.

52 American Institute of CPAs Christopher Shaowei Attorney at Law, Patent Attorney NTD Law Office Palo Alto, CA Christopher Shaowei is a partner at NTD Law Office and NTD Patent & Trademark Agency Ltd. He has served as the vice general president of LES China and is Vice Chairman of the China Trademark Association. Christopher is an intellectual property attorney from China. In his more than twenty years of practice, he counsels international clients on patent transaction works including licensing, R&D collaboration and patent portfolio management. He has also litigated many complex cases and has frequently represented his clients before administrative agencies in China. Christopher has been honored by Asialaw in the Leading Lawyers 2005 Survey. In an editorial summary provided by Managing Intellectual Property on his nomination as a leading practitioner of 2009, he received recommendations: “Christopher Shaowei from NTD Patent & Trademark Agency is a well-respected patent litigator. Clients like his execution, pro-activeness and creativity. ‘He consistently comes up with new and creative approaches to resolving our issues. These kinds of skills and acumen are so lacking in typical Chinese firms,’ says one client.”

53 American Institute of CPAs For additional information, please contact Thomas Louthan, Vice President, American Learning Network, via e-mail: Contact Us

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