Chinese Trends in Company Investigations
By Maarten Roos
Common is the story of the foreigner who thought he was buying from a Chinese company, only to find out later that the Chinese company never existed – making any claim for repayment futile. This extreme example serves to illustrate the need to know one’s Chinese business partner beyond the rituals of exchanging name cards and sharing food and drink; with cultural and language barriers clouding mutual perceptions, it is all the more important to understand whom you are dealing with.
How deep an understanding is appropriate depends on the transaction at hand. To acquire a Chinese target company and all its existing liabilities, an in-depth legal and financial due diligence is recommended, while for a simple commercial transaction a copy of the Chinese company’s business license may be sufficiently re-assuring. In many cases, the middle way is to check a target company’s Company File.
Company File
Every company registered and validly existing in China has a Company File. China does not have a central registrar; instead the Company File is kept with the Administration for Industry and Commerce (AIC) at the district or township, municipal, provincial or national level where the target company is registered. We generally distinguish the content of the Company File under two types:
- Basic information confirming the company’s vitals, including its current shareholders, registered capital, legal address, legal representative and business scope.
- Extensive information, which usually includes the company’s establishment files (e.g. Articles of Association, list of directors), annual inspection reports and penalties (if any), etc.
Access
An investigation of a target’s Company File is by far the most direct and the least costly means to independently investigate a company’s official legal status; however this is considerably complicated in that the level of access to the public and even lawyers varies greatly from place to place, as does the availability of extensive information.
This can be illustrated with some examples.
- In Suzhou and Fuzhou, a member of the public (with ID card) can access both the basic file and the more extensive information.
- In Shanghai and in Binzhou (in Shandong), a target company’s basic information is open to the public, while the combination of a lawyer’s license and law firm introduction letter will give direct access to the extensive information.
- Recently Hangzhou, Wenzhou and Shenzhen have adopted more restrictive internal policies on access: applications from lawyers for extensive information are no longer entertained unless accompanied by a court filing or the consent of the target company.
The extended information can be difficult (or impossible) to access but could include “treasures” on the target company’s health, and as such can be useful in making decisions on whether to do business with this target company, whether filing a lawsuit against it would be worthwhile, etc. Basic information is often less valuable, but at least confirms the existence of the target company, and tells of the activities that it may engage in.
Recent trends
The recent adoption of more restrictive policies in Wenzhou, Hangzhou, Shenzhen and some other localities seems to counter the trend of increasing transparency of China’s legal and business environment, by effectively cancelling the option to check on Chinese-registered companies without their knowledge and for a reasonable price. In some cases, it may be feasible to ask a company for permission to check, but Chinese businessmen often see this as a sign of mistrust – not the best way to start a business relationship in China. At the same time, many other AIC’s are adopting less restrictive policies, with an increasing number opening their full registry to the public. It will be interesting – and important to foreign investors doing business with Chinese counterparts – to see which trend will persist.
Maarten Roos, Senior Consultant of Wang Jing & Co. Law Firm
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March 6th, 2009 at 3:27 pm
Thank you for this helpful information.
What about to access information on Beijing registered companies, and what is there the trend?
March 7th, 2009 at 9:07 am
Correct, it is a good idea to investigate who you work with. Last year I was going to rent a shop but thought it would be a good idea to check if the current landlord at that time told me the truth about rental terms, his company registration, etc. So I found a lawyer in Shanghai so we got permission to look at the files in the database of the local industry and commerce. As expected we could see from the info that there were some problems. I asked several lawyers about the fee, and was quoted RMB 1000 to 150 for investigating the files. So shop around if you have the need
March 7th, 2009 at 11:04 am
Thanks for the information. Is there any other way for accesing the legal existence of the provider? Actually getting the company file seems too complicated for some small deals that makes it not worthy. What would you recommend?
Thanks and regards.
March 10th, 2009 at 3:00 am
In response to the above questions:
The Beijing AIC’s generally are quite easy to work with. With a Chinese lawyer’s license, access is given to the full internal file of a company.
To confirm the legal assistance of a company in China, you could ask that company for a copy of its business license. This copy could then be attached to the contract. If the company is not willing to provide this, an expense of RMB 1000-2000 may be worthwhile even for a small deal, especially if you plan to work with this company more often.
mjroos@wjnco.com
March 10th, 2009 at 11:48 am
Why pay RMB 1000 to 2000 when you can pay RMB 300 or less
March 11th, 2009 at 3:49 am
If a company will not give you a copy of their Business Licence as part of a contract walk away. Also take a copy of the ID Card of the Legal Representative on the Business Licence. It is not unreasonable to ask for this.
May 16th, 2009 at 7:17 am
Well Maarten is dead right.
However I think this is the same registering office where PRC trading companies named X is registering to get into the business as the office you must address to get reliable information about the activity and assets of the latter company X .
Bearing in mind the government officials do not earn much, some are asking for little help to make your company look like better in the records and some others are asking more money to get more accurate information…..
This makes the investigation process really ……
Apart from that , it is often that you get screwed up by the system. I mean , you will most likely need to hire a local if you re running reasonnable size operations in China. I do have couple of stories where smart local guys joined as General Managers some companies (SME’s and MNC’s) and bugger off couple of months later with all company information and often money as well and set up their own business 300 mt away and known from everyone .It should take only another 3 to 5 years and lots of incured costs to win a potential court case … but the guy had disapeared and your business as well even earlier …
Any comments….
October 25th, 2009 at 5:37 am
Nice to hear differend sides to problems.
I have a special case,used a Shanghai company for over five years,made new order mars last year were they send proforma Invoice on container of products. I paid 40% , they have 30days to produse the product,the last 60% is paid when its ready to ship out. I got now singnals it was ready to ship out not even after 60 days. Contacted the factory that said they was not making this goods any more,they were going to pay me back after 30 days not to worry, nothing came but I got mail again every so often they were going to pay back. I got a mail in august last year that a new manager had taken over and now problem he was going to pay it back. I asked for a whriten sertificat stating he would pay back the money, I got that dated 11.th september stating he would pay back the money on ore before 15.th october last year, nothing came and after that mail every month stating they would pay back,they also said they had used the money in production.
I were at the Canton fair last week, were the company was represented with a qite large stand. Had a talk with one of the managers, that was going to take it up with the directors as soon as he go back to Shangai. I got mail back from them that made me very mad, as far as I can see have they used my money as a loan, Have now maid an Invoice to them with Intrest etc. It were us 17000,00 my Invoice is now us 26274,00 with intest etc. I am looking for a legal person that can take this in cort in Shanghai. Add all expenses on to the bill. I dont think this company will have much sympati in cort with all the lies have given
November 13th, 2009 at 10:00 am
One really has to be so careful with business dealing like these. so this information is really great and extremely helpful. I would also have to agree with Davids comment he is so right if the Business License is not given as part of the agreement then rather walk away be safer than sorry at the end of the day.