Getting Money Out of China: It’s Complicated, Part 6

Last year we did a five part series on the difficulties in getting money out of China. Since that time things have gotten a little better and a lot clearer. They have gotten better in that China seems to have eased off the brakes ever so slightly and they have gotten clearer in that experience has taught us the kinds of deals almost certainly to go through with money sent and those that have no chance, and what fits in between.

Our original post in this series, Getting Money Out of China: It’s Complicated, we wrote on how incredibly frequently Western companies have been needing legal help in an (often desperate) effort to get money out of China so they can get funds due to them on all sorts of deals. On our China Law Blog Facebook Page, I linked over to the original post and described it as “In which we begin to answer THE question everybody is asking.” That has turned out to be no exaggeration as that Facebook post alone has generated nearly 25,000 views. But as I noted in part 2 of this series, most of the interest in getting money out of China involves purchasing single family homes in the United States or in Europe and those deals are just not going to happen legally if they require money from the PRC.

In part 2, we discussed how the Chinese government seems to apply a three part test in determining whether to allow funds to leave China to go to a Western company. Based on the many deals on which our China attorneys have worked, and the reports we get from our clients and their bankers and financiers, and from China consultants and bankers and financiers with whom we regularly share information, we see legitimacy and benefit to China and deal structure as the three key elements. Part 2 focused on legitimacy. Part 3, focused on the “benefit to China” element and Part 4 on what is/was happening in China that is slowly down payments from China. Part 5, focused on increasing your odds of getting paid.

Since our five part series last year the flurry of companies trying to get money out of China to get paid has slowed down, but our having seen a bunch of the deals that failed have taught us the following two very important and not terribly related things:

Draft your contract with the Bank of China and the Chinese Government in mind. Two similar technology licensing deals. One has no Chinese version and talks about software that can be used to maximize retail sales. The other has a Chinese version and talks about how the software can maximize production line efficiencies. The second one has a much better chance of clearing Chinese government approval than the first one. It’s important that you get this right from the get-go because once you don’t, your odds of the money ever leaving have permanently decreased.

Draft your contract based assuming the money you need will never leave China. In other words, your contract should have a provision(s) making clear exactly what will happen if the funds never arrive.

For instance, if you are seeking equity funding for your company, you must not grant the putative Chinese funder equity in your company before you receive the money required. I know this sounds obvious, but trust me when I say that is not always the case. If you allow a Chinese company to get equity in your company before you receive the money, you will likely be facing the untenable situation of needing to sue (perhaps even in China) and argue for stripping the Chinese company of all equity for non-payment. Structure your deal so equity comes only upon payment!

Where we also often see problems is in licensing deals where the American or European company will provide some or all of its technology before receiving payment. As we wrote way back in 2011, in On Licensing your Software to China, this made sense well before China put the clamps on money leaving:

How do you plan to make arrangement for payments? I note that your normal system is 30 days net. In general, this is not a good idea in China the Chinese government has made it progressively more difficult for Chinese entities to convert RMB into dollars for payment to foreign software and service providers. The restrictions come in two forms: 1) unreasonable demands for contract registration and then delays and unreasonable documentation requirements for contract registration, and 2) imposition of withholding and other taxes, often in unreasonable amounts. All of these burdens must be met before the Chinese party is permitted to make payments. The demands and requirements vary from district to district and from bank to bank with no predictable pattern. This process can often delay payments for many months or even years.

Because of the above, it is not usually prudent in China to deliver software product or to provide services until after you have been paid or at least until after you have been paid for a significant amount of your fee. These payment problems are entirely beyond the ability of the Chinese customer to control, so even customers acting in good faith may be in a position where they cannot pay.

For more on why it always makes sense to get paid upfront when licensing your technology to a Chinese company, check out Three Myths of China Technology Transfers

Your Chinese Counter-Party Should Figure out how to get the Money out of China, not you. Our China lawyers are nearly always contacted by the American or the European side for help on getting their Chinese counterparty’s money out of China. This does not make much sense and our response is usually to tell them that my law firm’s role should be to represent the foreign party in overseeing what the Chinese party does to try to free up its own money and if the Chinese party is serious about wanting to get its money out of China, it should hire its own Chinese lawyer in China.  Guess what, if your Chinese counterparty is unwilling to hire and pay for its own lawyer to help it get the money it owes you out of China it must not want to pay you nearly as much as it claims.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.